Gold (XAU/USD) rose to about $4,630 in early Asian trade on Friday, as traders moved towards safe-haven assets amid renewed tensions in the Middle East. US President Donald Trump said the US would keep a naval blockade of Iranian ports, with concerns that the Strait of Hormuz may not reopen soon.
Iranian President Masoud Pezeshkian described the blockade as an “extension of military operations” and said it was “intolerable”. The dispute and any continued closure of the Strait of Hormuz could add to inflation fears and reduce expectations for rate cuts, which can limit demand for non-interest-bearing gold.
Federal Reserve Policy Outlook
The US Federal Reserve held its key policy rate steady on Wednesday. Fed Chair Jerome Powell said the economic outlook remained highly uncertain, and the Middle East conflict had added to that uncertainty.
Gold is used as a store of value and is often sought during market stress, and it is also used as a hedge against inflation and weaker currencies. Central banks added 1,136 tonnes of gold worth around $70 billion in 2022, the highest annual purchase on record, with China, India and Turkey among those increasing reserves.
Gold often moves in the opposite direction to the US Dollar and US Treasuries. It can also fall when interest rates rise and can weaken when stock markets rally.
With gold near $4,630, the immediate focus is on the tension between safe-haven demand from the Iranian naval blockade and the headwind from high interest rates. The Federal Reserve’s decision to hold rates steady means the cost of holding a non-yielding asset remains significant. We should therefore be cautious about chasing this rally without considering the downside risk if geopolitical temperatures cool.
Options Volatility Strategy
The situation in the Strait of Hormuz has caused implied volatility in gold options to surge, with the Gold Volatility Index (GVZ) now trading near 18-month highs of 24.5. This makes buying options outright very expensive, eroding potential profits through time decay. Instead, we should consider strategies that take advantage of this high volatility, such as selling covered calls against existing gold holdings or using spreads to define risk.
We have to remember the strong underlying support from central banks, which continued their aggressive buying through 2025, adding over 1,040 tonnes to global reserves. This persistent demand creates a potential floor under the market, suggesting that any price dips may be met with strong buying interest. This structural bid makes outright short positions particularly risky in the current environment.
The conflict’s effect on inflation is a key variable, as the recent April 2026 Consumer Price Index reading of 3.7% is keeping the Fed on the sidelines. A sustained blockade could push energy and shipping costs higher, further complicating the Fed’s path and reinforcing the “higher for longer” interest rate narrative. This scenario would likely cap gold’s upside potential despite the ongoing geopolitical crisis.
Finally, we must watch gold’s inverse relationship with the US Dollar, which remains strong due to attractive US interest rates. A sudden de-escalation in the Middle East could quickly shift market focus back to yield, strengthening the dollar and triggering a rapid sell-off in gold. We saw a similar dynamic play out during a brief market scare in the third quarter of 2025, when a quick resolution led to a sharp, dollar-driven correction in precious metals.
