Has the operating logic of the US dollar, crude oil, and gold changed under the Middle East situation?

Source: Allianz Fund

Recent developments in the Middle East have disrupted the market logic of the US dollar, crude oil, and gold, highlighting the importance of tactical flexibility and reminding investors to build resilient portfolios rather than relying solely on historical correlations for allocation.

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　　Currently, crude oil’s trading logic is completely dominated by geopolitical supply risks; the US dollar has regained its short-term safe haven status; gold now displays more tactical asset characteristics.

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　　As volatility increases across currencies, commodities, and equities, short-term price trends are driven not only by fundamentals but also by capital flows and portfolio positioning.

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　　We believe investors should look beyond current market volatility and focus on mid-term drivers: maintain the view that the US dollar is set to weaken in the medium to long term, and see gold’s mid-term outlook as still shaped by structural changes.

　　Meanwhile, the historic negative correlation between the US dollar and gold has been reinforced, with the dollar rising as gold declines—a stark reversal from the pre-conflict trend of a weakening dollar and strengthening gold. What are the underlying drivers of this shift?

　　Although gold prices have eased short term, we believe the mid-term trend is still driven by structural factors including global central bank buying, fiscal uncertainty, diversification of the international monetary system, and more traditional factors such as the US dollar, real yield moves, and retail demand.

　　However, in the short run, investors should closely monitor retail gold ETF flows and technical signals. Should the gold price correct further, attractive re-entry points may emerge.

　　Given heightened volatility across currencies, commodities, and equities, short-term price movements are becoming increasingly driven by fund flows and portfolio adjustments rather than fundamentals.

　　Such volatility is affecting portfolio hedging strategies. For most multi-asset portfolios, protective options are now in-the-money due to recent market action. As uncertainty remains high but risk premiums have been noticeably repriced, it is necessary to reevaluate the cost and benefit of maintaining hedges at current levels.

　　This article is reproduced from Allianz Global Investors’ “The US dollar, oil and gold: changing dynamics?” and was translated by Allianz Fund. The ‘we’ in this article refers to Allianz Global Investors.

Editor: Zhu Henan