Drama and calm, all at once

Israel’s strike on Iran sparked a predictable immediate reaction, with oil rising and equities falling. But, in a microcosm of the post-Liberation Day market moves, stocks soon recovered. While the US economy appears sound and retail investors relaxed, gold is telling us a very different story, underlining the value of effective diversification.

16 June 2025

On Friday Israel launched an attack on Iran ostensibly designed to take out its nuclear capability. Those with long enough memories will recall the Osirak attack in 1981 when Israel knocked out a nuclear reactor near Baghdad. This began what was known as the ‘Begin Doctrine’ in which Israel would pre-emptively seek to degrade the nuclear capabilities of its enemies. Last week’s attack on Iran fell neatly into this category. And the initial market reaction also followed a pattern. Oil jumped nearly 13% on the day, while safe haven assets including the Swiss franc, Japanese yen and gold all climbed. Stocks of course fell, fearful of what higher energy prices would mean for corporate cost bases and supply chains. So far, so predictable.

But then by Monday, the main developed market index futures were back in positive territory and oil had fallen back again. All of this feels like a replay of Liberation Day. A major volatility event occurs with adverse market consequences, before an unexpected recovery. Only this time around the recovery has been incredibly quick. What is going on? One proximate reason may of course be that Iran’s critical crude oil-exporting infrastructure has so far not been damaged by the attacks. This may yet change. But it should also be borne in mind that the US is now technically a net exporter of oil. Yes it’s true that its refinery capacity is not set up for converting domestic production into a grade suitable for its own consumption but overall the impact of oil spikes is less than it was. This may well be having a calming effect on global markets, but more persuasive answers perhaps lie among the fundamental state of the US economy and the evolving nature of retail equity investing. On the former, unemployment remains low at 4.1% while hourly earnings growth for employees is 3.9% on the previous year (CPI inflation is running at 2.4%). So, the economy – and therefore by inference corporate earnings – seem sound. Add to which the fact that retail investors using discussion forums like Reddit and app-based trading platforms like Robinhood are generally bullish and more inclined to buy the dip.

This doesn’t mean they are ‘right’ per se. Gold is telling us something completely different, that there are investors out there who are concerned about the state of the world. Describing the markets as inconsistent may be missing the point. It’s perfectly reasonable to want to capture equity upside while mitigating potential sources of geopolitical volatility. Holding stocks and gold simultaneously has achieved this remarkably well so far in 2025.

From 27 Dec 2019 to 16 Jun 2025