Geopolitics, Oil & Inflation: A Market Update

Recent global events have served as a stark reminder of how quickly international tensions can impact financial markets. Understanding the complex relationship between energy prices, inflation, and asset behaviour is essential for maintaining a resilient, long-term investment strategy.

Key Takeaways

Geopolitical tensions and supply disruptions in the Middle East have caused a sharp spike in oil prices, reigniting concerns about the knock-on effects for headline inflation.
Despite rising inflation risks, gold recently saw a surprising price drop, behaving more like a momentum-driven risk asset than its traditional role as a safe haven.
The recent unpredictability of gold highlights a core principle of robust financial planning: the necessity of "diversifying your diversifiers" to protect your portfolio across all market environments.

Geopolitics and Inflation: The Impact of an Oil Supply Shock

Geopolitical tension has once again reminded markets how sensitive energy prices can be. Missile strikes in the Middle East and the effective closure of the Strait of Hormuz (a narrow shipping route responsible for transporting roughly 20% of the world’s oil) have sent energy markets into a frenzy.

The price of Brent crude oil surged by around 40% in March, at one point touching about $118 per barrel. That kind of move is rarely subtle.

At the time of writing, the price is closer to about $105 per barrel. This is still significantly above the current normal ranges of about $70-$85 per barrel.

What we are seeing is a classic negative supply shock. If less oil can leave the Persian Gulf, the price must rise until demand falls enough to match the reduced supply.

The challenge is that oil demand is not particularly sensitive to price in the short term. People still need to commute, goods still need transporting, and homes still need heating. In other words, most of us cannot suddenly decide to stop using energy just because it has become more expensive.

Demand tends to change gradually, while prices adjust almost instantly. This is why oil prices can move so sharply during geopolitical disruptions.

Higher Oil Prices Raise Questions about Future Inflation

Energy costs feed directly into headline inflation, so rising oil prices tend to show up fairly quickly in official data. Even measures of core inflation, which exclude energy and food, are not entirely immune.

Energy is embedded throughout the economy. Airlines do not sell oil, but jet fuel is one of their largest expenses. When oil prices rise, airlines often increase ticket prices to cover the higher fuel costs.

Central banks worry about what economists call second‑order effects. If households begin to expect persistently higher inflation, workers may demand higher wages. Businesses then raise prices to cover higher wage costs, which leads to higher inflation. It is a cycle policymakers would very much prefer to avoid.

The good news is that today’s environment is not the same as 2022. Back then we had pent‑up post‑lockdown demand, tangled supply chains, aggressive fiscal stimulus and very tight labour markets. Those conditions amplified inflationary pressures. The UK economy today looks quite different. Higher prices may simply reduce demand enough to prevent inflation from spiraling. At least, that is the current theory.

Gold’s Slightly Awkward Moment

In an environment where growth slows and inflation rises, gold would normally be expected to perform well. That is precisely why many portfolios include it as a diversifier. Instead, the gold price fell by around 11% in March, its worst monthly performance since 2008, following the outbreak of the Iran conflict.

To understand why, it helps to look at how gold reached such lofty levels in the first place. Gold had enjoyed an extraordinary run, peaking at over $5,500 per ounce earlier this year and more than doubling from levels seen a few years earlier. Even after its recent decline, it remains far above where the rally began.

What makes that rise slightly puzzling is that the macroeconomic backdrop did not obviously justify it. Global growth was reasonably strong, inflation had moderated (albeit still above central bank targets), equity markets were performing well, and interest rates were relatively high. Normally, higher interest rates make gold less attractive because the metal generates no income. Yet the rally continued…

When Gold Became a Momentum Trade

One possible explanation is that gold simply became a momentum trade. Hedge funds, retail investors and trend‑followers piled into the trade as prices kept rising. As often happens, the narrative supporting the rally became stronger the longer the rally continued.

Several analysts have suggested that many of the popular explanations for gold’s surge did not fully hold up under scrutiny. When large numbers of investors pile into a trade for momentum rather than fundamentals, the market can become vulnerable to sudden reversals. That reversal briefly appeared earlier in the year when gold prices dropped sharply. But the decline was short‑lived and the rally resumed almost immediately. The froth, it seems, never fully left the gold market.

Has Gold Forgotten its Job?

This brings us to the present. Many investors who bought gold earlier in the rally were still sitting on large profits. When geopolitical tensions increased and markets became more uncertain, some investors did what investors often do, they sold what had been working. In other words, gold temporarily behaved more like a ‘risk asset’ than a ‘safe haven’.

That leaves us with the slightly ironic situation where the asset designed to protect portfolios during turbulent periods has, at least recently, been less helpful than expected.

Equity markets, while volatile, have (so far) shown notable resilience in the face of geopolitical tensions but gold’s recent performance has still raised a few eyebrows.

Perhaps if equities fall further, gold will rediscover its traditional role. But gold’s recent behavior has understandably dented some investors’ confidence in that assumption.

Waiting for the Froth to Clear

The difficulty with assets like gold is that they are partly driven by belief and sentiment, which are notoriously difficult to measure. Until more speculative positions have unwound, historical relationships between gold, inflation and market risk may remain unreliable.

How do we know when the excess enthusiasm has finally cleared out? The honest answer is, we do not. Some might argue that with gold now only slightly above where it started the year, the recent volatility was merely a temporary wobble.

Others would point out that prices are still far above where the latest bull market began, suggesting there could be further downside before the market resets

Diversifying your Diversifiers

Gold still has a role in portfolios, but recent events are a useful reminder that no diversifier works perfectly all the time. Just because something has historically provided protection does not guarantee it will do so in every market environment.

So whether you are a committed gold enthusiast or merely a cautious admirer, it is usually wise to diversify your diversifiers. After all, relying on a single hedge can occasionally leave you feeling…slightly unhedged.

All details are correct at the time of writing, 9th April 2026

The value of investments and pensions and the income they produce can fall as well as rise. You may get back less than you invested.

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.

Approver Quilter Financial Services Limited, April 2026.