Line chart of Gold price ($ per troy ounce) showing Gold rises on Middle East tensions
The price of gold rose to its highest level in nearly seven years on Monday as tension in the Middle East fuelled demand for safe places to warehouse cash.
Investors moved into assets seen as havens as they awaited any Iranian response to the US killing of a senior Iranian commander, sending the Japanese yen higher and extending a sell-off in global stock markets.
Gold rose as much as 2.3 per cent to $1,580 a troy ounce, its highest level since April 2013, boosting the share prices of producers in the UK and South Africa. Harmony Gold climbed 3 per cent, while London-listed Polyus International advanced 1 per cent.
“Markets tend to overreact to geopolitics when trading is thin, as it has been during the post-holiday period, but investors are right to fret about what is happening in the Middle East,” said Natasha Kaneva, commodities analyst at JPMorgan.
Crude oil prices hit a three-month high as they rose as much as 2 per cent to trade around $70 a barrel, their highest level since an attack on a Saudi oil facility last year. Brent has climbed more than 5 per cent since US airstrikes on Friday.
European and Asian equity markets fell, with the composite Stoxx Europe 600 down 0.9 per cent in morning trading. Japan’s Nikkei was the worst major performer as it fell 1.9 per cent after coming back online following the holiday season, its steepest one-day drop since early October.
S&P 500 futures deepened their declines through the day, as they pointed to falls of 0.5 per cent when Wall Street opens. The Cboe’s volatility index, or Vix, rose 1.6 points to 15.66 but was still below its long term average of roughly 20.
Relations between Washington and Tehran soured further over the weekend as Donald Trump warned Iran would be hit “harder than they have ever been hit before” if the country retaliates to the killing of Qassem Soleimani. In a series of increasingly bellicose tweets, the president said he would respond “perhaps in a disproportionate manner” if Iran hits American targets.
“We’re left waiting to see if we get an aggressive response from Iran with the whole Middle East likely feeling vulnerable,” said Deutsche Bank strategist Jim Reid.
Tehran said it would not abide by any of its commitments to the 2015 nuclear accord following the killing of its top commander, as hundreds of thousands of Iranians gathered in Iran’s holiest city to mourn Soleimani.
President Donald Trump also threatened neighbouring Iraq with sanctions “like they’ve never seen before” if it expels American troops in retaliation for the assassination in Baghdad on Friday.
Analysts at Goldman Sachs and UBS both said gold was likely to be a better bet for investors than oil if geopolitical tensions worsen.
“We believe that the current risk premium embedded in Brent prices is already elevated, with an actual supply disruption now necessary to sustain oil prices,” said Jeffrey Currie, global head of commodities research at Goldman Sachs
“In contrast, history shows that under most outcomes gold will probably rally to well beyond current levels.”
Over the past month, gold has risen by more than $100 an ounce, helped by a lower US dollar and increased demand from investors. A weaker dollar is a positive for gold because it makes the metal cheaper for buyers holding other currencies.
Gold-backed exchange-traded funds added more than 48,000 ounces to their holdings on Friday, taking purchases so far in 2020 to almost 173,000 ounces. The total amount of gold owned by ETFs now stands at a two-month high of 81.6m ounces, according to Bloomberg.
“Gold and silver prices are enjoying a strong seasonal rally that had looked quite unlikely until late last year,” said Richard Hatch, analyst at Berenberg.
