Gold surged close to record highs as investors abandoned traditional government bonds for safe-haven assets amid escalating conflict in Iran. The precious metal jumped 2.5 percent to more than $5,400 a troy ounce before settling 1 percent higher, while two-year German bund yields climbed 0.07 percentage points to 2.08 percent as traders braced for inflation.

Major asset managers are rethinking traditional portfolio strategies, with hedge fund Marshall Wace's Seb Barker noting that bonds are failing to provide protection against risk-off events. BlackRock analysts warned that long-term government bonds are unreliable portfolio ballast given potential stagflationary risks from Middle East escalation. The US dollar strengthened 0.9 percent against a basket of peers, playing its typical haven role.

Some large investors are reducing equity exposure and increasing cash positions. French fund house Carmignac has been cutting its holdings, including in Japanese markets, while Citi downgraded Japanese equities to underweight given their exposure to higher oil prices. Analysts at Natixis suggest a lasting conflict could add as much as 15 percent to gold prices, with most gains likely in the first few weeks.