Gold slips after brief surge on Iran tensions, but Metals Focus still sees upside
Although gold has benefited as a general defensive asset to hedge against economic uncertainty and inflation, its role as a safe-haven during specific geopolitical risk events remains lackluster.
At the start of the week, gold prices briefly tested resistance around $5,400 an ounce as investors reacted to the joint U.S.-Israel military action against Iran. However, that momentum has been short-lived, with gold prices falling below $5,100 an ounce as of Thursday afternoon.
In their latest commodity report, analysts at Metals Focus said that although gold’s inability to hold its recent gains is disappointing, they continue to see a path higher for the precious metal through the rest of the year.
“The boost that gold tends to enjoy because of geopolitical tension or shocks rarely lasts,” the analysts said in a note. “Indeed, this is largely the case for most markets, leaving aside, of course, assets whose supply, demand, or trade are directly affected by the event in question. Even in cases when conflicts have been prolonged, investor fatigue has soon set in and appetite for safe-haven assets dissipated. This will likely be the case again with the Iranian war. However, we believe that there is a sizeable tail risk that, due to the specifics of the conflict this time, things could be different.”
The analysts said that the growing risks to global energy markets as the conflict impacts shipping through the Strait of Hormuz, and the fact that 12 nations have been drawn into the conflict, raise a real risk that the war could widen further.
However, the analysts also noted that there is very little support for another prolonged conflict in the Middle East.
“A prolonged and/or out-of-control war in Iran so close to the mid-term US elections comes with political risks for the Republican Party. Voters will likely not appreciate the inevitable monetary and human life cost of this, or the impact on inflation (real and perceived) of ever-rising oil prices,” the analysts said.
The analysts said that in this scenario they would expect gold prices to retest January’s all-time highs, but that the metal would not have enough momentum for sustained gains.
However, they added that any indication that the conflict is expanding or that oil markets become significantly disrupted could easily push gold prices to $6,000 an ounce.
Looking beyond event-driven volatility, the British research firm remains bullish on gold, as the conflict highlights broader economic and geopolitical uncertainty.
“Whether one agrees with the US’ decision to strike Iran or not, it comes with lasting implications regarding the country’s foreign policy. Coupled with the recent intervention in Venezuela, it signals an appetite to induce regime or political change, using hard power if necessary, to meet its strategic objectives. Meanwhile, the lack of coordination or consultation with most of its allies signals a shift toward unilateralism. On balance, such shifts in the world’s largest economy and leading military power amplify geopolitical uncertainty,” the analysts said.
Metals Focus also suggested that the military action could support gold relative to U.S. Treasuries. Although the U.S. dollar has attracted some investment flows this week, U.S. 10-year yields have moved back above 4%.
“The limited flows into treasuries that we have seen this week add to existing concerns about their traditional safe-haven asset role,” the analysts said. “This is clearly positive for gold, both directly, as it competes with treasuries for safe-haven investment flows, and indirectly, due to the impact these concerns are having on the US dollar.”
