(Kitco News) - As the Strait of Hormuz enters its 11th day of closure, the true battleground may not be in the Middle East, but within the U.S. Treasury market.
While markets initially anticipated lower yields following the geopolitical shock, the 10-year U.S. Treasury yield has instead climbed to 4.2%. According to Luke Groman, founder and president of Forest for the Trees, the ongoing energy crisis is exposing clear limitations within the global financial system.
Groman notes that the primary threat to the U.S. economic structure is rooted in debt and international dollar reliance, rather than kinetic military engagements.
"Iran doesn't have to beat the U.S. military, if it even could, which I doubt," Groman said. "All it has to beat is the bond market."
The Treasury Selloff Mechanics
The core issue stems from the heavy reliance on the U.S. dollar by foreign nations that are concurrently dependent on imported energy. Global investors hold $27 trillion in net dollar-denominated assets. When oil prices spike and the dollar strengthens, foreign entities are forced into a difficult position.
"They have to have energy, they have to have food, they have to have these commodities," Groman explained. "And so they will sell dollar assets starting with treasuries because they're the deepest and most liquid, to essentially buy oil."
This dynamic creates a cycle where foreign nations effectively use the U.S. bond market to finance their energy deficits, driving yields higher.
The current fiscal reality exacerbates this vulnerability. The Congressional Budget Office projects the federal budget deficit in fiscal year 2026 at $1.9 trillion. Furthermore, recent U.S. Treasury data indicates foreign holdings of U.S. Treasuries sit at an all-time high of roughly $9.4 trillion.
"US debt to GDP was 31% in 1973," Groman stated. "It's 122% today. It's apples and oranges." This figure aligns with recent federal government data placing the U.S. debt to GDP ratio around 122% to 124%.
Geopolitical Realignments
Beyond the immediate financial mechanics, the conflict highlights shifting geopolitical realities regarding supply chain security. The Strait of Hormuz is a critical chokepoint, historically facilitating the transit of approximately 20 million barrels of oil per day, representing over 25% of global seaborne oil trade. Asian markets are heavily dependent on this corridor, receiving nearly 90% of the crude and condensate exports that pass through it.
Despite the broader market treating the Strait as effectively choked off, reports indicate that specific buyers are still securing shipments. Data shows that China alone receives nearly 38% of all oil exports transiting the Strait. Furthermore, China has established a massive supply cushion, having emerged as the buyer of over 90% of Iran's oil exports. Analysts estimate that roughly 50 million barrels of Iranian crude are currently sitting offshore near China and Malaysia.
"There's still oil flowing to China and nobody else," Groman noted, pointing out the strategic sorting currently underway.
This reality has broader implications for global power dynamics, prompting questions about the delay in securing the critical waterway.
"We have the greatest military in the history of the world," Groman stated. "So why are we on day 11 of the greatest military in the history of the world not able to open the Strait of Hormuz?"
The Final Settlement Asset
As investors navigate a highly leveraged financial system dealing with energy disruptions, inflation, and shifting global power, physical assets are taking precedence over sovereign paper. With sovereign debt levels at historic highs, gold is increasingly viewed as the ultimate safe haven.
"Trust is in a bear market, and the bear market is getting worse and worse," Groman said. "Gold is ultimately just a 0% yielding bond of finite issuance and infinite face value. And it's nobody else's obligation. It is final settlement."
For the average investor, Groman suggests a prudent allocation model similar to the historic Jacob Fugger portfolio, advising a 15% to 25% allocation in physical gold alongside cash, equities, and real estate.
However, his near-term outlook for the yellow metal is tightly linked to the ongoing developments in the Middle East.
"All roads lead to gold, in my opinion," Groman concluded. "I think gold will be over $6,000 by midyear if what I'm hearing is right about the Strait of Hormuz."