(Yicai) March 23 -- Geopolitical risks have increased sharply, oil supply has been disrupted, inflation pressures are emerging, and global stock markets have plunged. Historical experience suggests this would normally lead to a surge in gold prices. 

But this time, gold’s safe-haven function has vanished, with spot prices sinking more than 10 percent in the past week and silver dropping by 16 percent. How should we interpret this phenomenon, and does gold still hold its value?

The Iran conflict has affected civilian infrastructure in the Middle East, triggering panic among wealthy individuals in the region. Many family offices are hurriedly relocating to Singapore and Hong Kong, and high-net-worth individuals are quickly liquidating assets. They are reluctant to hold even gold, preferring to keep cash in US dollars, which has led to a sustained discount in gold prices in Dubai.

More importantly, oil shipments are being disrupted, and Middle Eastern countries have significantly cut production, leading to a notable decrease in oil revenues. However, fiscal expenditure in these countries still needs to be maintained. Many nations are selling assets from their foreign exchange reserves, including US stocks and gold. Unless there is a change in the outlook for oil revenues or if Middle Eastern oil-producing nations begin to lower fiscal expenditure and social welfare, the short-term volatility in gold prices is likely to continue.

I am still bullish on gold in the long term. Geopolitical turmoil in the Middle East may persist for a long time and restoring oil supply will take time, as US Federal Reserve Chairman Jerome Powell has stated, but global inflation may not return to the 2 percent level.

Should financial turmoil arise in the United States, the Fed will need to implement quantitative easing to quell panic. The fiscal deficits of major industrial countries are virtually unresolvable, and central banks will ultimately have to absorb government debt. Gold continues to be the best decentralized asset to mitigate the "moral hazard" of central banks, whereby state intervention amid a crisis can inadvertently encourage the kind of risk-taking that created the crisis in the first place.

Oil shipments through the Strait of Hormuz have plunged amid the Iran conflict, dropping from pre-war levels of 19.3 million barrels per day to just 700,000 barrels. Dubai oil futures are at USD134 per barrel, while West Texas Intermediate is only at USD98 per barrel. The reason for this is that WTI is crucial to US gasoline prices, Americans' wallets, and electoral votes; therefore, the US is releasing oil reserves to maintain order in the West Coast oil market.

The Asian crude oil market is in disarray, with countries scrambling to secure contracts for African oil, which is unaffected by the war. Most Persian Gulf oil is sold to Asia, with China, Japan, South Korea, and India being the largest buyers. At the same time, there is a significant disparity between futures and spot prices, as investors seem to believe that the conflict will conclude within a month. As a result, medium to long-term futures prices are gradually returning to a level of USD60 to USD70 per barrel.

The impact of soaring oil prices on the global economy is starting to emerge. Gasoline, natural gas, and electricity prices are rising in numerous countries, gradually spilling over into the living costs. The cost-of-living crisis has already become a serious social issue, triggering consumption downgrades, and the situation is bound to deteriorate further. 

The K-shaped gap between high-income and middle-to-low-income households is widening, adding to the challenges, and could potentially fuel extreme voter sentiments in upcoming elections. Inflationary pressures are once again on the rise, placing major central banks in a bind as they simultaneously face the dual risks of economic recession and inflation.

In addition, supply chains and Wall Street are also being impacted. Many countries in Southeast Asia are already facing energy shortages and electricity shortfalls, leading manufacturers to crimp production. Chip production in South Korea and Taiwan requires much power, but natural gas reserves are critically low, and helium is even scarcer. Oil supply disruptions will soon manifest in the availability of chemical raw materials, spreading to nearly all industries. This suggests that a supply chain crisis is brewing.

(The author is president and chief economist at Springs Capital Hong Kong. This article reflects his personal views and does not represent the official position or forecasts of the organization.)

Editor: Tom Litting