Explaining the Gold Surge After the Iran Strike on US Forces: How Instability Affects Gold Prices
As tensions flared in the Middle East last week, the price of gold vaulted to US$1,611 on Wednesday (January 8) before stabilizing at US$1,540 per ounce early the next day. US gold futures peaked at $1,549, a jump of 1.4 percent. The episode saw the precious metal hit a seven-year high.
Precipitated by the killing of top Iranian general Qasem Soleimani, head of the Islamic Republic’s elite Quds Force, the US commodities market seesawed in the wake of Iran’s retaliatory airstrikes on US military bases in Iraq. Immediately following the strikes early Wednesday West Texas Intermediate crude oil futures soared 4 percent, reaching a multi-month high. By the afternoon, it had dropped 5 percent, sinking below US$60 per barrel.
Investors were quick to flood the market when the threat of escalation peaked after news broke that Soleimani had been killed on January 3. Five days later, gold prices plummetted after Iran’s retaliatory strike on Iraqi military bases resulted in no casualties, a seemingly calculated move to avoid war with western powers and begin on the long road to rapprochement.
It’s an investors’ truism that geopolitical uncertainty is good for gold. However, the case of Iran and the US is an unusual one that offers new insights into how world powers will influence gold prices in the years ahead. Armed with fresh insights into the global gold market, you can make better investment decisions and trade precious metals with greater confidence.
Why Trump’s Strategy Was Emboldened
Unlike his predecessors, President Donald Trump’s engagement strategy with Iran was reassured by the country’s status as a net oil exporter. This message is often lost in analyses of the situation by news media: as of September 2019, the US exports more oil products, both crude and refined petroleum, than it imports.
Until November, the US had not been energy independent since the Second World War. Following the 1973 oil crisis, American dependence on foreign oil skyrocketed. By 1989, the nation’s dependence on foreign oil hit 47 percent, and finally reached a high of 60 percent in 2006. President Trump’s energy policy has long sought to transition the nation away from foreign oil dependence—a promise his administration finally made good on this fall.
The implications for Middle Eastern engagement are clear: if a hard power confrontation with Iran causes global oil prices to rise, the effect will have a net benefit on the overall economy of the United States. Further, the Fed’s commitment to low interest rates means the inflationary effects of higher oil prices are unlikely to be counteracted with contractionary monetary policy.
Gold Mechanics 101: Why Prices Fluctuate
History is no stranger to conflict and, with it, the rise and fall of gold prices. Long considered a blue-chip investment for managing risk, especially via futures contracts and derivatives, gold remains subject to the same volatility and speculation-driven movements that plague other assets.
During economic upswings, gold prices generally constrict. When the Federal Reserve announced that it would halt its extraordinary late-2000s stimulus campaign by mid-2014, the price of gold bullion sank by 20 percent. During the Fed’s quantitative easing scheme, the US dollar was held low, which made alternative assets such as gold and silver an attractive low-cost investment.
Geopolitical tensions have a similar effect on the US dollar. Military conflict strikes fear in investors who anticipate the possibility of a world in which the US government cannot perform its monetary and fiscal functions. In this case, precious metals such as gold and silver would supplant the US dollar as a practical, scarce, and immutable store of wealth.
Small wonder that gold prices enjoyed rapid, multi-year growth from years 2003 to 2007 (Iraq War), 1979 to 1982 (Iranian Revolution and Iran-Iraq War), and 1990-1991 during the US invasion of Kuwait.
How Other Commodities Were Affected
Other precious metals also saw movement overnight. Platinum jumped 1.3 percent to rise above the $990 mark while palladium inched downward by 0.1 percent to $1,957 despite being on pace for a strong 3 percent gain on the week. News of the attack also caused oil prices to soar 5.7 percent in the same time frame.
US Treasuries also rose sharply during this time. After the news broke that Iran had fired missiles into Iraqi territory, 10-year Treasury notes rose 4 points to about 1.9 percent and 30-year bonds jumped to 2.35 percent. Investors caused an uptrend in the bond market amid fear that an active military conflict might erupt between Washington and Tehran.
Trade Wars and Gold Prices
Uncertainty can be brought about by any number of environmental or political developments. Natural disasters, nuclear accidents, referendum or election results (as seen with Brexit and the US presidential election in 2016), all have tangible effects on precious metal prices whenever they signal uncertainty to the investing public.
Similarly, the ongoing US-Chinese economic conflict is also having an effect on gold prices. Following the imposition of a new 15 percent tariff on Chinese goods in August, gold futures rose more than 1 percent. When the Phase One trade agreement was announced on December 6, gold prices briefly rose before dipping into the negatives.
As the pendulum swings toward certainty and stability, as it did with the signing of the Phase One trade agreement, gold markets dip. When instability, uncertainty, and tensions rise, as they did when President Trump made hostile remarks in August 2017 toward North Korean leaders, gold futures surge under the expectation that the US dollar may lose value.
Gold: A Disaster Hedge
If former Fed Chairman Ben Bernake can admit that he doesn’t understand what causes the movement of gold prices, then we won’t pretend to either. Commodity prices are a function of an extraordinarily complex and multivariate reciprocation. However, what’s certain is that gold has traditionally served as a form of disaster insurance that buffers investors’ wealth when public sentiment turns pessimistic.
The value of gold hinges on psychological factors that cannot be quantified the same way that P/E ratios or dividend yields might affect stocks. When global affairs turn hostile, it’s a good time to buy gold for your IRA. To help diversify your retirement account and maintain a credible store of wealth during financial or political crises, IRA-approved gold bullion or ETFs are an excellent option.
Gold, as a store of value, not only survives the travails of conflict but booms under them. If history teaches us that conflict is a constant, we have every reason to entrust gold as a permanent safe-haven for our wealth. This is the lesson that the Iran conflict brings to bear: the yellow metal will always have an attractive glint when tensions run high.