Gold price comes close to breaking $2,000 as Middle East tensions escalate

[MongiIG]

Gold remains one of the best portfolio hedges in the eyes of many investors, and particularly when geopolitical tensions rise.

Source: Bloomberg

 

Forex Shares Commodities Gold United States Israel

 Charles Archer | Financial Writer, London | Publication date: Friday 27 October 2023 01:50

Gold is currently trading close to its record high, at $1,985/oz, having risen steadily since the start of the Israel-Hamas war on 7 October. The traditional real asset inflation-hedge remains a favoured investment in times of geopolitical volatility — as it can act to preserve purchasing power through inflationary periods and also hedge against falling equities.

For context, during the 2008 financial crisis, the S&P 500 fell by 37% while gold rose by 24%. With several analysts now expecting a harder global economic landing, amid fears that a regional war in the Middle East could keep Brent Crude elevated, gold prices could rise even higher.

Israel-Hamas war updates

Sadly, the war seems to show no signs of abating — though according to Wall Street Journal sources, the expected ground invasion of North Gaza by Israel is being delayed, to allow the US to place air defences in the region to protect US troops.

Meanwhile, EU leaders are calling for ‘pauses’ in the fighting to allow ‘rapid, safe, and unhindered’ access for aid into Gaza, after expressing the ‘gravest concern for the humanitarian situation’ on the ground. Further, UN official Martin Griffiths has warned that aid is ‘barely trickling’ into Gaza. Other than access to water, the key contention is fuel — with Israel accusing Hamas of stockpiling vital reserves.

More than 1,400 people were killed in the initial Hamas attacks on Israel, and Israel says more than 220 people are still being held as hostages. However, Hamas has claimed that 50 hostages have been killed by Israeli bombardments — alongside 7,000 Palestinians in the Strip.

While US President Biden considers that there is no going back to the status quo between Israeli and Palestinians ‘as it stood on 6 October,’ many analysts think that the next true escalation will begin with the ground invasion of Gaza — which may or may not come.

Gold price risks and rewards

While further escalation in the Middle East could see gold rise higher, it’s also worth noting that US GDP grew by a significant 4.9% in the third quarter. While there are some caveats to this headline figure, it does give the Federal Reserve space to keep rates higher for longer, especially as CPI inflation in the US has crept back up to 3.7%.

While the US central bank is expected to pause next week, it has strongly hinted that one more hike may be coming down the track. With 10 year US Treasury yields already at 5%, even higher rates could act as a headwind for gold prices. For context, gold’s price trades in an unofficial pair with the US Dollar as rate rises make the global reserve currency more attractive, leading to gold selloffs.

Longer-term — and with a strong caveat that all investments come with risk — many investors consider the wider macroeconomic environment to be favourable for the precious metal. Aside from the Middle East, there was already huge geopolitical tensions concerning both Russia and Ukraine, and China and Taiwan.

Globally, the fight with inflation is not over, with many central banks still tackling price rises significantly above the usual 2% target. There are also widespread concerns over how historically elevated public and private debt piles can be managed through this high rate environment.

Nevertheless, rates across most of the western world may be close to a peak, as the economic damage of further hikes could trigger a recession more damaging than the remaining inflation.

Central banks are also reversing decades of prior policy and are buying gold at a record pace. For context, the World Gold Council estimates they added a whopping 1,136 tonnes of gold worth some $70 billion to their stockpiles in 2022, by far the most of any year in records going back to 1950.

Overall, this could leave gold as an attractive portfolio investment, though historically, equities have tended to outperform the precious metal over the long term.

But of course, past performance is not an indicator of future returns.

 

 

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