“The Hormuz Premium” - When Assets Began Incorporating a New Cost

The Scale of the Shock

Following the start of the Iran-War, in March 2026, the global oil supply dropped by 10.1 million barrels per day, representing the greatest single disruption in the history of the oil market, greater than the combined impact of the 1973 Arab oil embargo and the 1979 Iranian Revolution. The inflationary effects were felt straight away. In March the CPI was 3.3%, a full percentage point higher than in February. By April it reached 3.8%, the highest since 2023, with inflation rising by 0.6% that month. In May it was 4.2%. The Dallas Federal Reserve carried out a scenario analysis, with the most optimistic case, where the strait reopens after just one quarter, would still lead to a 0.6 percentage point increase in U.S. headline inflation.

The Ripple - Its Effect on each Asset Class

Oil and energy equities are the first-order trade. XLE, the Energy Select Sector SPDR Fund, a major exchange-traded fund (ETF) tracking large-cap U.S. energy companies in the S&P 500 consistently outperformed the market since the conflict started. The S&P 500 has been protected by technology's 38% weight, a sector relatively unaffected by energy input costs. The S&P 500 in fact rose from a closing low of 6,344 at the end of March to record highs by midsummer, with the markets in general treating the conflict as temporary.

Fixed income was caught in a stagflationary squeeze, with the 10-year yield rising above 4.7% as the market priced in both ongoing inflation and a Federal Reserve unable to cut. Governor Waller said in July that it may be necessary to increase rates to curb price pressures, and money markets subsequently priced in a 50% chance of a hike. Instead of benefiting from a flight to quality in a geopolitical shock, long-duration Treasuries have been pressured by inflation repricing. Bonds are therefore being pulled in two opposite directions.

The dollar has acted as the preferred safe-haven asset in the foreign exchange market. In March it reached 99.695 as safe-haven flows drawn in by the war combined with the collapse of expectations for Fed rate cuts, pushing the greenback to its highest level in several months. According to AEI's analysis the reason was two-fold, with both the rise in the VIX and the surge in oil prices contributing to dollar strength. The fundamental risk facing the dollar is a continuing conflict that tips the global economy into stagflation, after which even safe-haven flows might not counteract the long-term decline in demand for U.S. exports.

Gold has been the most interesting of the cross-asset movements. On March 1st, the day Iran declared the strait closed, spot gold rose 5.2% and ended at $5,246 per ounce. It has since fallen back to the $4,070 to $4,090 range, about 27% below the $5,590 record high it reached in January. The main reason for this decline is dollar strength driven by expectations of hawkish Fed policy. Gold is pricing both geopolitical risk and the implications of monetary policy at the same time, and currently the latter has the upper hand. The $4,000 level is the line in the sand.

Three Scenarios

Our Position: Long Gold

Gold is the purest expression of the Iran premium because it performs across all three scenarios and, unlike oil futures or energy equities, does not require the investor to have a view on whether the conflict escalates or resolves. In the base case (a prolonged standoff) inflation remains high, Warsh holds rates steady, and the $4,000 support level is maintained by central bank purchases driving demand. In the bear case (a full escalation), gold's historical wartime performance, showing an average gain of 8.98% over the 12 months after major conflicts according to the World Gold Council, suggests prices move toward analyst estimates of $5,500 to $6,000. Even in the bull case (a rapid resolution) the decline is manageable: prices drop back to between $3,600 and $3,800, but this represents a defined fall from current levels rather than a structural break. Central banks regard gold as a hedge against inflation and have been acting on that view. In June 2026 the PBoC purchased 14.93 tonnes, its largest monthly amount since 2023 and its 20th consecutive month of buying.

The biggest risk is the dollar. A rise in the DXY remains the main structural obstacle for gold's dollar-denominated price. If Warsh signals a rate hike and the dollar strengthens from here, gold will face short-term pressure regardless of the level of geopolitical risk. Watch the DXY as the key indicator. Should the dollar break lower, the main obstacle would be removed and the path would be clear toward JPMorgan's year-end target of $4,400.

The Trade