How to hedge against the risk of war with Iran? Market votes: gold, not bonds

Iran war risks are rising, reshaping the global landscape of safe-haven assets. Large institutional investors are placing gold and the US dollar above traditional safe-haven government bonds, marking a significant reassessment of the market’s definition of "safe assets." On Monday, international spot gold prices soared 2.6% to over $5,400 per ounce, approaching historic highs. The catalyst was a drone attack on Qatar's natural gas facilities, sparking fresh energy crisis concerns. Meanwhile, European natural gas prices surged more than 30% in a single day, inflation expectations are heating up sharply, driving global bond yields higher—Germany’s two-year government bond yield rose 8 basis points to 2.09%, and the traditional safe-haven function of bonds failed again. On March 2, Financial Times editor Roula Khalaf wrote that as Iran expands its attack targets from Qatar to Saudi energy infrastructure, concerns about prolonged conflict continue to rise, and the logic for choosing safe-haven assets is being rewritten. The divergence in market trends is having a direct impact on investors’ portfolio allocations. Several large asset management firms have begun cutting equity exposure, partly shifting towards cash, and are hedging downside risks by buying S&P 500 put options. Bonds lose ground, gold takes over Government bonds’ performance in this round of risk events has left the market deeply disappointed. Seb Barker, Chief Market Strategist at Marshall Wace hedge fund, said, "Once again, we’ve seen bonds fail to provide protection during risk avoidance events, while gold has delivered." The "Gulf situation" strengthens the rationale for increasing the allocation to so-called "non-bond safe-haven assets." Analysts at BlackRock Investment Institute also believe market reactions indicate that "given the stagflation risks of this Middle East conflict escalation, long-term government bonds are no longer a reliable ballast for investment portfolios." Robert Tipp, Global Head of Bonds at PGIM, attributed gold’s strength to a "global uncertainty premium"—investors are asking: "What counts as a safe-haven asset in the current environment? What counts as a neutral asset?" Gold suffered significant losses in the sharp correction last January, but this rally has essentially erased those declines. Imaru Casanova, Portfolio Manager at VanEck precious metals asset management, said, "Time and again, gold has defended its status as the ultimate safe-haven asset during periods of high uncertainty and risk." Analysts at Natixis estimate that if the Iran conflict continues, gold prices could rise as much as 15%, with gains likely concentrated in the first few weeks of the conflict. Inflation expectations repriced, rate cut paths narrowed The inflation shock caused by soaring energy prices is forcing the market to sharply reduce expectations for central bank rate cuts, pushing bond yields across the board. In the UK, swap contracts show there’s now less than a 100% probability of two 25-basis-point cuts by the Bank of England this year. Currently, the market implies only about a 60% chance of a second cut. The two-year gilt yield, sensitive to rate expectations, rose 11 basis points to 3.64%. In the Eurozone, rate cut expectations have shrunk even more. The probability of another 25-basis-point cut this year dropped from about 55% last week to about 15%. Nicolas Trindade, Senior Portfolio Manager at BNP Paribas Asset Management, warned, "The longer the conflict lasts, the more central banks will need to incorporate these inflation pressures into forecasts, which will put upward pressure on interest rates." Portfolio moves: reducing equities, holding cash, buying protection Meanwhile, faced with high uncertainty, large asset managers are proactively adjusting their holdings. French asset manager Carmignac is reducing equity exposure, including in Japan, and considering cutting back on oil-related stocks that have surged sharply. Investment committee member Kevin Thozet said, “We’re lowering risk exposure because the range of possibilities is quite wide.” He added that Carmignac, while buying S&P 500 put options, is also keeping some funds withdrawn from equities in cash to hedge the risk to government bonds posed by soaring inflation. Beata Manthey, Global Head of Equity Strategy at Citi, said the bank downgraded its rating for Japanese stocks from overweight to underweight due to Japan’s particular exposure to rising oil prices; meanwhile, Citi upgraded UK equities, citing the market’s high weighting in defense and energy sectors. Manthey also cautioned, "If the situation deteriorates further, investors will lighten positions wherever possible, and we’ll see more coordinated selling. For now, it’s still relatively selective." Strait of Hormuz: The biggest unresolved variable Among all risk factors, the main concern for large investors is: How long can high oil and gas prices last, and to what extent will passage through the Strait of Hormuz be disrupted? This key Gulf chokepoint is critical to global bulk maritime trade. A senior trader at a major Wall Street bank bluntly stated, "Wars always last longer than we expect," and listed the US dollar and gold as the two main safe-haven trades right now. On Monday, the dollar rose 0.9% against a basket of currencies, continuing its traditional safe-haven role during non-domestic US stress events. Analysts point out that as Iran expands the scope of attacks from Qatar to Saudi Arabia’s energy infrastructure, the pricing of prolonged conflict is deepening. Against this backdrop, gold and the dollar have become the clearest consensus among institutional investors for safe-haven allocations in the current market environment. Risk Warning and Disclaimer The market has risks, investment requires caution. This article does not constitute personal investment advice and has not taken into account individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this article is at your own risk.