Amid the ongoing trade tensions between the United States and China, gold remains unrivaled in the global market. It has recently hit a record high of $3,500 per ounce, with a three-month average holding steady around $3,300. The $3,500 level represents a long-term psychological benchmark — a reflection of investors' persistent risk aversion and diminishing confidence in current economic and fiscal policies.

Geopolitical instability, uncertainty surrounding interest rates, and unresolved trade negotiations have only reinforced gold’s role as a primary safe haven for global investors. At the same time, the escalation of military tensions between Iran and Israel — punctuated by a 12-day conflict — has renewed fears of a larger regional war in the Middle East. Such developments carry significant implications for global oil markets and the broader economic outlook.

In alignment with its "maximum pressure" strategy, President Trump reiterated that any country or company purchasing oil from Iran would be barred from trading with the United States. Iran, for its part, remains wary that Washington may use any agreement as a stepping stone toward regime change. Meanwhile, the U.S. remains deeply distrustful of Iran’s intentions, particularly regarding its suspected covert nuclear weapons program. The most plausible outcome, therefore, appears to be either regime change — through military dominance or diplomatic surrender — or the exclusion of Iran from long-term regional peace frameworks like the Abraham Accords.

In parallel, the U.S. has announced plans to build its first large-scale nuclear power plant in over 15 years — to be located in New York — signaling its renewed focus on energy independence and domestic nuclear capability.

Back in the Persian Gulf, the potential closure of the Strait of Hormuz looms large as a serious threat to global oil supply. This narrow waterway is the most vital oil transit chokepoint in the world, with over 21 million barrels passing through daily — nearly 21% of global oil consumption. The Middle East is the largest oil exporter, while Asia, led by China, is the largest importer. Given China’s heavy reliance on Middle Eastern oil, any flare-up in this region could deal a severe blow to the Chinese economy.

As of mid-2025, oil prices have hovered in the $65–$70 per barrel range — a level widely seen as fair value. The question remains whether further escalation in U.S.-Iran-Israel tensions will cause oil prices to spike or whether the market will trend lower amid expected global economic slowdown, potentially dipping below the $60 threshold again.

Saudi officials, meanwhile, have publicly stated their preparedness to withstand a prolonged period of low oil prices. A combination of weaker industrial output, declining transportation demand, and slower global economic growth has curbed oil consumption. This demand-side reduction, when paired with supply-side fragility, could lead to sharper price swings in the months ahead.

Ultimately, the threat to the Strait of Hormuz remains a critical concern. The market's reaction to the recent 12-day war between Iran and Israel mirrored the initial shock witnessed during the early days of the Russia-Ukraine conflict — characterized by swift volatility, panic-driven trading, and heightened global uncertainty. Should tensions escalate further in the region, a similar pattern of disruption in energy markets and investor sentiment is highly likely.

One of the key drivers behind the continued surge in gold demand is the growing fear of a potential devaluation of China’s yuan — a strategic countermeasure Beijing may adopt in response to mounting U.S. tariffs. The lack of meaningful progress in trade negotiations has only deepened the atmosphere of uncertainty, reinforcing gold’s appeal as a hedge against risk.

China is now under increasing pressure to reduce its structural imbalances and shift focus toward strengthening domestic consumption. However, low-income countries around the world face even greater challenges. Limited resources leave them ill-equipped to absorb new economic shocks, forcing them into some of the most difficult policy decisions in recent history.

This divergence highlights two distinct clusters among major global economies. On one side are nations such as China, India, Iran, and Mexico — countries with moderate GDP per capita but relatively high income inequality. These characteristics make them more vulnerable to internal social and economic disruptions during crises. The fact that U.S. tariff negotiations in the first half of 2025 have concentrated on India, Mexico, and China only reinforces this point. Their economic fragility stems from limited wealth per capita combined with unequal access to resources — a volatile mix in times of uncertainty.

In contrast, countries like Japan, Germany, and Canada represent a separate cluster, marked by high GDP per capita, low inequality, strong social infrastructure, and well-distributed resilience. These nations are better equipped to weather global economic storms with greater stability.

China’s economy currently depends heavily on exports, which has served as a buffer against internal instability. However, long-term sustainability demands reform. Beijing must begin to shift from an overreliance on export capacity toward stimulating domestic demand and empowering its own consumer base. Corporate profitability remains under pressure through early 2025, but stabilization may occur with successful government interventions.Foreign investors continue to show interest, influenced by stronger corporate governance, tax incentives, and strategic reforms—but macro headwinds and global uncertainties linger. If China seeks to gain an upper hand in the global economy, it must eventually shed its identity as a “developing nation.

Goldman Sachs notes that for every 1% increase in the yuan’s value against the U.S. dollar, Chinese stock indices could rise by approximately 3%. However, this growth would only materialize if China simultaneously improves corporate profitability and attracts stronger foreign investment.

The U.S. dollar is currently under multifaceted pressure — weakened by poor economic data, risky fiscal policies, and heightened volatility in the bond market. The intensifying global trade war has significantly downgraded global growth forecasts. As of 2025, global GDP growth has dropped below 2%, marking its weakest level since 2009.

With sluggish growth, persistent inflation, and ongoing trade uncertainty in the U.S., the most likely scenario is a global period of stagflation. By mid-2025, particularly in May and June, nearly 35% of global fund managers reported their most “underweight” position in the U.S. dollar since 2006. The dollar index declined by nearly 10% in the first half of 2025 — its worst annual start since 1973.

Foreign investors are increasingly hedging their exposure to the dollar, even when acquiring U.S. assets. This trend reflects a broader sentiment of retreat from U.S. markets and a global inclination to diversify away from the dollar. A soft landing remains more likely than a hard crash for the U.S. economy, but the dollar trade is now extremely crowded and appears to be on a downward path toward the administration’s stated target of 90.

This shift is accompanied by rising preference for alternative assets like the euro, the Japanese yen, and emerging market securities.

The Return of the Yen: Japan’s Resurgent Currency

Japan's yen is making a notable comeback. Several factors support this resurgence:

• Roughly 60% of Japan’s inflation basket is now experiencing growth.

• The country’s service price index remains close to 3%.

• The strong historical correlation (about 90%) between USD/JPY and U.S. 10-year bond yields is breaking down.

• The Bank of Japan is progressing faster than expected toward monetary policy normalization, reducing bond purchases at a pace exceeding even the U.S. Federal Reserve (relative to GDP).
  
  

Japanese insurance companies hold around $2.5 trillion in U.S. assets. Any repatriation or increased hedging of those investments would drive additional demand for the yen. According to valuation models and purchasing power parity, the fair value of USD/JPY is around 140 or lower.

Meanwhile, the U.S. dollar is losing its status as a safe haven. Traditionally moving inversely to U.S. equities, the dollar now trends in sync with them — a shift that signals weakening investor confidence in its role as a defensive asset. Foreign investment in U.S. assets is declining, and America’s international capital balance is now the weakest among G10 nations.

Central banks — particularly in China, India, and several Middle Eastern countries — have ramped up gold purchases as a strategic store of value. As of the end of April, China's official gold reserves stood at 73.77 million ounces, valued at approximately $243.59 billion. This marks a growing trend among nations seeking insulation from currency volatility and global financial instability.

Across the financial landscape, markets are increasingly fragile and unpredictable. Equities, bonds, and even cryptocurrencies have been subjected to high levels of volatility, while gold continues to stand out for its stability and steady upward trend. In this uncertain climate, markets are quick to embrace any signals of de-escalation, especially in commodities such as oil and base metals. A potential reduction in tensions would also benefit Asian stock markets and boost demand for currencies like the Chinese yuan, Canadian dollar, and Australian dollar.

Earlier in the year, there were expectations of a high-level meeting between U.S. President Trump and Chinese President Xi in May. That meeting did not materialize. As a result, traders, economic partners, and investors are now closely watching whether such a meeting will take place before the end of 2025.