Gold prices have gained by more than 8 percent, testing a nine-week high of $1985 an ounce since October 07 when the decade-long clash between Israel and Palestine culminated into a war. Prices disregarded the robust US economic release boosting bets of higher-for-longer interest rates which end up lifting the US currency and bond yields.
Geopolitical tensions often have a significant impact on the performance of gold. The yellow metal is considered a safe-haven asset, meaning that investors tend to folk to it in times of uncertainty, instability, and geopolitical crisis. There are several reasons why geopolitical tensions can affect the price and performance of gold.
When geopolitical tensions rise, investors become more risk averse. They fear that conflicts could negatively impact financial markets and economies across the globe. As a result, they seek refuge in assets like gold, which are historically perceived as safe investments.
Conflicts or wars between countries can lead to currency devaluation or depreciation. Investors may turn to gold as a hedge against these currency fluctuations, as gold is not tied to any specific currency and retains its intrinsic value.
Gold is a highly liquid asset, which means it can be easily bought and sold, even in times of crisis. This liquidity makes it an attractive option for investors looking to move their funds quickly in volatile markets.
Geopolitical conflicts can disrupt supply chains and create economic uncertainty, potentially leading to inflation. Gold is often seen as a hedge against inflation, making it more attractive to investors when they are concerned about rising prices or commodities and raw materials.
Some central banks increase their gold reserves during times of geopolitical turmoil, enhance their financial stability, and reduce reliance on foreign currencies.
Furthermore, gold is the best portfolio diversifier. Geopolitical tensions highlight the importance of diversifying investment portfolios. Investors may increase their exposure to gold to diversify their holdings and reduce overall portfolio risk.
History has shown that gold tends to perform well during geopolitical crises. This historical precedent can influence investor behavior, as they turn to gold based on past performance.
In the Gulf War period during 1990-91, there was a spike in gold prices, but it was short-lived. Similarly, in the Iraq war in 2003, there was an initial rally in the prices of the yellow metal. Lastly, gold prices jumped to a near-record high when the Russian-Ukraine war was triggered in February 2022.
At the same time, the magnitude of the effect on prices depends on the severity and duration of the geopolitical events, as well as other economic and financial factors. While gold tends to perform well during periods of heightened geopolitical tensions, it is not immune to other market influences such as interest rates, economic data, and overall market sentiment.
The present upbeat momentum in prices may continue if the war between the countries escalates further and if it threatens the domestic security in the West Asian countries. Chances of challenges in oil supplies, as the region contributes more than 30 percent of global oil also growing worries over inflation lifting the sentiments of safe assets.
In the meantime, the US Federal Reserve may keep rates higher for longer due to upbeat economic releases that may lift the US currency and bond yield. This may restrict a long bull run in safe-haven assets. On the price side, COMEX gold futures have an immediate resistance at $1990 followed by $2072 an ounce. Stiff downside support is placed at $1800 an ounce.
First published in Mint
