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Gold likely to continue record-breaking streak as Middle East tensions simmer
The escalating crisis in the Middle East will lead to prices of commodities such as gold and crude oil surging, as a war premium will be baked into the total value. Gold is up by 29 percent since early October and by 18 percent since mid-February.
In a note to investors, international brokerage HSBC wrote, "Escalating geopolitical risks significantly bolster gold as hot and cold conflicts, and a record number of elections this year, keep the risk thermometer high. Trade risks associated with geopolitical risks are also gold positive."
However, the precious metal prices were surging even before Iran's retaliatory attack on Israel. In fact, crude, equities, the dollar, and bond yields have been rising in tandem.
The US Fed indicated the quantum of monetary policy easing would be under expectations at 75 basis points over three meetings. However, while this led brief sell-off of gold, resulting in a price drop below $2,000 per ounce. However, rather than a decline, gold has instead rallied.
So, what's driving the surge in gold prices?
1. Safe Haven DemandEscalating global geopolitical risks are prompting investors to seek out gold as a safe haven. As the crisis between Israel-Iran and Israel-Hamas deepens, gold will continue to rally as investors will seek safe-haven in metal, leading to rising demand. Gold is sensitive to geopolitical risks,
especially in cases of outright military conflict.
For extreme geopolitical risks, only gold and silver display consistent safe-haven properties, and holding precious metals within a diversified portfolio lowers the impact of geopolitical risk. "This influence will likely continue and while gold prices may fall from what we believe are inflated levels we believe geopolitical risks will sustain gold at higher levels than would otherwise be the case," said HSBC.
2. Central Bank buying
Central banks across the world have remained buyers of gold, though not at the same levels in 2022 and 2023. After central banks went through a period of declining interest in holding bullion, the opposite trend emerged as geopolitical risks rank high among the reasons for central banks to accumulate gold.Over the past two years, the central banks have emerged once again as powerful participants in the bullion market and gold is enjoying a
renaissance among reserve managers.
"Even when geopolitical factors may not directly encourage countries to hold a larger gold share, they may do so indirectly through the economic motives of managing foreign exchange reserves in a new and more unpredictable environment. In addition to geopolitical reasons, growing forex reserves tend to lead to greater diversification, with gold a prime candidate in this regard," added HSBC.
The precious metal is also reliable in emergencies, and in terms of national emergency or conflict when national currencies may not be redeemable, gold can be mobilised.
In 2022, central banks purchased around 1,082 tonnes of gold, with an estimated 1,037 tonnes of purchases in 2023. In January 2024, the World Gold Council estimated that another 39 tonnes of gold was accumulated by central banks in January.
3. Record high equitiesGold and equities traditionally share an inverse relationship. However, in the current leg of the rally, record-high gold prices have accompanied record-high equity valuations. HSBC noted that there may be a connection that could continue to help determine future gold prices. High equity
valuations can be good for gold in two ways.
First, the wealth and liquidity effect of higher equities may allow for the purchase of more gold, than would otherwise be the case. Second, the substantial purchases of gold have materialised led by asset and portfolio managers as well as insurance companies and pension managers, as a way to hedge equity market risk.
"A correction in equities or any noticeable diminution in equity strength could also reduce the need to purchase gold, and a severe enough retracement could trigger gold liquidation," added the brokerage.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Source: https://www.tradingview.com/