The current geopolitical tensions in the Strait of Hormuz heighten risks associated with the recovery of oil and gas infrastructure, particularly in light of central bank diversification strategies and the renewed focus on gold purchases. Per the full note from J.P. Morgan, these developments point to significant implications for the price of precious metals, with central banks considering increasing their gold reserves. In the context of potential supply disruptions in the energy markets, the interplay between oil prices and currency fluctuations is also critical, as traders closely monitor how these factors may influence USD movements relative to commodity-linked currencies.
What the desk is arguing
The desk argues that the escalating situation in the Strait of Hormuz poses serious threats to both oil supply routes and the broader recovery in oil infrastructure. This assessment is based on insights from J.P. Morgan, highlighting that geopolitical stability is integral to energy market confidence.
Additionally, the commentary indicates a shift in central banks' attitudes towards diversifying their reserves, particularly in gold. J.P. Morgan suggests that as uncertainties rise, central banks may amplify their investments in gold, which traditionally serves as a safe haven during turbulent times.
Where it sits in our coverage
Our consensus target for the relevant commodity-linked currencies is 1.075, with a range from 1.04 to 1.12. Key firms have set varying targets, including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with jpmorgan, indicating an expectation for significant movements in response to geopolitical developments, keeping the target at the upper end of the consensus range.
How other firms see it
Aligned firms like jpmorgan anticipate higher gold purchases from central banks, whereas bofa holds a contrary stance suggesting more cautious positioning amid potential easing measures from some central banks. The differing forecasts reflect varying levels of confidence in the geopolitical landscape and its impact on commodity prices.
As geopolitical risks increase, closely watch the correlations between oil prices and major pairs like USD/TRY or USD/RUB, which may become more volatile as these developments progress.
01Geopolitical tensions in the Strait of Hormuz threaten oil and gas infrastructure recovery.
02Central banks may increase gold acquisitions as a counter-cyclical measure.
03The interplay between energy supply disruptions and USD movements is crucial.
04The desk's outlook aligns with J.P. Morgan's target, emphasizing higher potential for gold and oil prices.
Market implications
Trading strategies should be refined with an eye on levels around 1.075 for commodity-linked pairs, particularly as tensions surrounding the Strait of Hormuz may induce volatility. Look for positioning shifts as central banks respond to geopolitical risks, which could trigger movements in gold prices and relation currencies.
Risks to this view
Should there be de-escalation in geopolitical tensions or a shift in central bank policies that prompts increased monetary easing, the bullish outlook could be invalidated, leading to downward pressures on gold and oil prices.
Hello, and welcome to another episode of At Any Rate. I'm Greg Scheer, your host for today, and I head up base and precious metals research at J.P. Morgan.
The Middle East recovery process has deteriorated further this week as the U.S. and Iran continue to exchange strikes. Oil flows through the Strait of Hormuz have dropped to around 2 MBD in the last few days, just a quarter of June's average and 10% of pre-war levels. While we view these disruptions as temporary, they have expanded potential risks across commodities.
This is especially the case for LNG, where the ramp-up process of Qatar's liquefaction facilities has slowed down, putting pressure on gas prices as winter is fast approaching. Increased uncertainty around energy has also brought back questions on precious metals, especially gold, and the interplay between, in the near term, real rates and inflation, and in the longer term, central bank behavior. While interest rates are definitely one part of this discussion, another question is on central bank behavior, i.e. whether or not we're going to see continued diversification and what this means for prices over the medium term.
This central bank question is what I will focus on today, while Ohtar Doukbouazé, who leads our European natural gas and global LNG research, will discuss this week's natural gas developments. Ohtar, it's great to see you again. Let's start with gas first.
Obviously, we've seen flows through the strait deteriorate. What are you seeing on the LNG movements in the strait at the moment? Hi, Greg, and thanks for having me.
As you can imagine, we follow these movements very closely, and we publish regular global LNG supply and shipping tracker, which is very popular with our clients, especially over the last few months. So what we see in terms of ship movements is that during June, when the MOU still stood, we saw a lot of empty tankers crossing the strait, entering into the Gulf towards the Qatari-Russia facilities. And as of earlier this week, when we last looked at these ships, we counted about 24 vessels inside the Gulf, out of which about 18 of them were around Ras Lafan, which is the main loading port for Qatar LNG, loading or already loaded.
Accordingly, the Qatar utilization itself, like if we measure this by loaded vessels, have increased to 30% compared to 16% in June. However, when we look at the utilization based on the actual exports or actual exits through the Strait of Hormuz, the trends are very diverging. So when we estimated about 10% on utilization based on the Hormuz exits, we only saw two exits, two vessels in July so far.
One of them was Qatari vessel, one of them was Abu Dhabi Adnok vessel. So there is a diverging trend when we look at the loadings and when we look at the actual exits. Obviously, the strait transit has dropped.
However, Qatar still has some flexibility through onshore storage and through the floating storage to continue production. But obviously, the longer the strait stays closed, the higher the risks that Qatari may be forced to shut down production again. Thanks, Ohtar.
And thinking to the broader market here, what are the implications of this? And how do you see these risks on production restarts in the region influencing prices? Yes, I think this is very important.
And this is, I think, where the gas and oil markets differ significantly, because if Qatar is forced to shut down production again, we from the beginning of the conflict, we were estimating something like two to three months to full restart. Now, if Qatar is forced to shut down and then restart later in summer, and then you are two, three months to ramp up, we are already in the winter. And from the beginning of the conflict, the other argument we've been making, and we were asking our clients to be aware of this, was that the cornerstone of the market pricing and our price forecast as well, was that the Qatari volumes will be back and reliably running throughout the winter.
So yes, we may have relatively lower starting storage level for winter, but we still have the energy supply. If this assumption comes under question, we think that the price risks for winter especially, and then throughout the curve, can be significant. And we may argue that at 57, 58 euros today, we already are starting to price this risk premium.
Gotcha. So a decent amount of upside risk, if we think about the risks that surround this re-escalation that we're seeing. I think if we switch gears to my world, right, in the precious metals, gold and silver have come under pressure again this week amid this escalation.
We're seeing gold here retrace back towards around $4,000 per ounce. Silver has traded down to around $55 per ounce. And that is really being driven primarily by the near-term implications of these energy price risks, right?
The inflationary implications coming back in as we've seen a revival in the prices of oil products as well as natural gas. One interesting dynamic with this, and ultimately what we've been saying over the last few weeks, is in the very near term, gold is about Fed watching. We discussed that on this podcast a couple of weeks ago.
But when we think longer term, there have been these secular structural demand stories that have driven this rebasing, broader multi-year rebasing higher in gold. And one of the key ones within that is central bank demand. And on this point, we've been getting a lot of incoming questions trying to understand both in the very near term, the elasticity of central bank demand and its price responsiveness, but also from a broader perspective, has anything changed on that structural story of particularly EM-centric diversification into gold?
If we start with that second question, our view is no, that we're not seeing a sea change here. If we begin to kind of break that down, we're seeing a couple of indications that give us confidence in that for now. On one hand, we're seeing continued evidence into 2026 of increasing diversification by central banks.
So early indications in 2026 suggest, for instance, if we look at U.S. treasuries held in the Fed's custodial accounts for foreign officials, they've fallen down to levels last seen in 2012, which indicates ongoing reserve diversification. More gold specific, we've gotten the results of the 2026 central bank gold reserve survey from the World Gold Council. And I think importantly, a majority of these responses came after the U.S.-Iran conflict began at the end of February.
And that still shows significant reference here of strategic diversification away from the U.S. dollar and into gold. In fact, the percent of surveyed central banks that were expecting their own institutions' gold reserves to increase over the next 12 months was at a record high of around 45 percent. Within that context, we broadly do not think that there is a change here.
And we still think that there is a decent amount of dry powder when we look across the central bank landscape. While we've seen both price increases as well as accumulation drive the overall average holdings of the cohort, for instance, for EM and BM higher over the last two years, an interesting dynamic sits within that. If we look at EM central banks, which I think are the most important part of this driver at the end of the first quarter of 26, around 67 percent of total EM reserves, when we weighted by reserves, which is probably more fair, still hold less than 10 percent total in gold.
And within that context, what we ultimately think is that recent literature suggests that an optimal holding for banks of this profile could range somewhere around 20 percent or higher, depending on the exact duration of their portfolio. So long story short, we don't think anything has structurally changed. What we do think is that the breadth of central bank buying, which central banks have returned as net buyers since the basically since March.
So over April and May in terms of reported data, but its breadth has narrowed. And within that, we only really see two very strong emphatic dip buyers, which is essentially China and Poland. Why aren't more central banks taking advantage of this drop?
Well, ultimately, central banks are prudent custodians of reserves. And this Iranian U.S. conflict, which has risks to inflation, to energy prices, to consumer spending, very large macro risk from that perspective that the central bank might have to do things, including defending its own currency, really broke, in our view, the modus operandi. And from that perspective, we ultimately think what it's going to take is largely time, time and continued resolution and a diminishing of these risks to really restock this reserve.
The interesting dynamic within this is the formulaic price elasticity of central bank demand, particularly when we think about central bank demand, which is most central banks target their gold holdings as a share of total reserves. Well, when you get a price pullback, what that means is your existing gold holdings in percentage terms of the total total portfolio erodes. If we look at this, even at the over the second quarter of twenty twenty six, while we don't have the full scale of reported data, if we take the first quarter numbers where in our calculations, which account for unreported purchasing over over recent years, EM central bank holdings of a cohort have moved to close to 20 percent of total reserves by the end of the first quarter of twenty six.
If we flex that or the price decline over the course of the second quarter, that is alone shaves about two percentage points off of those holdings. And not only that, if we have our right in our assumption that this long term structural accumulation to move that target higher is still ongoing, what that means is that these current price levels, you ultimately have to buy more tons of gold to get the notional amount to move your share higher. And ultimately, when we think about the relationship of demand versus price, what we're looking at is tons versus price there.
And so from our perspective, this is there is still a very strong story in central banks as we go forward. It's likely not going to play a massive role as we look to the next couple of quarters. But over a medium term basis, it's still quite important for our view that prices out through the end of twenty twenty seven in gold begin to have much more of a structural recovery towards around five thousand dollars per ounce.
Well, that wraps it up for today. In summary, on the energy side, it's all about watching the Strait of Hormuz and the escalation between U.S. and Iran, which is having price implications given the risks again to flows, as well as on the LNG side, actual recovery in production that in itself factors into the precious metal space through the reaction function of the Fed. But on a longer term basis, we do think what we're seeing here is a bit of a pause in central bank buying, but not a U-turn.
Otar, thank you so much for joining me. To our listeners, thank you for tuning in to this commodities edition at JP Morgan's At Any Rate podcast. We look forward to continuing the conversation next week.
This communication is provided for information purposes only. Please refer to JP Morgan Research Reports related to its content for more information, including important disclosures. Twenty twenty six, JP Morgan Chase and Company, all rights reserved.
This episode was recorded on July 17th, twenty twenty six.