On Tuesday, January 7, the same day Iran launched a missile attack on Iraqi facilities housing U.S. troops, gold surged 2%. Iran’s attack was in response to a U.S. drone strike on January 3. The strike killed Iranian Major General Qasem Soleimani of the Islamic Revolutionary Guard Corps near Baghdad International Airport. That event also sparked an immediate increase in gold. From Thursday, January 2 to last Tuesday, gold jumped almost 6%, inspiring a number of news stories about buying gold.
Historically, increases in safe-haven asset prices tend to reduce once a crisis passes. This time could be different. Some analysts see U.S.-Iranian tensions persisting at least in the near term. In that case, collateral economic damage and a host of other gold-favorable conditions could make the gold “fear trade” more meaningful.
“Geopolitical Risk Premium” Potentially a Significant Benefit to Buying Gold
A recent CNBC.com article highlighted several analysts’ opinions. The analysts believe a sharp increase in geopolitical tensions will be a principal reasons “gold could rally for the rest of the year.” Safe-haven prices often moderate as quickly as they jump after geopolitical crises, which are often short-term events. But sometimes there’s concern these crises could persist and turn into bigger problems. Then, the bump in precious metals has the potential to last. On that subject, the CNBC.com piece quotes a client note authored by UBS commodity strategists Joni Teves and James Malcolm. They admit a reduction in tensions would bring gold values back down. But they said “further escalation likely would see a ramp-up in safe haven demand for gold.”
Other analysts cited in the CNBC.com article also acknowledge gold’s potential on the basis of geopolitical discord. Colin Hamilton of BMO Capital Markets told CNBC “gold is a good hedge” against geopolitical risk. He also explained that the “geopolitical risk premium” has been unavailable to gold for some time. Savers have adapted psychologically to a world where high international tensions are less unusual than in the past.
This could be an additional benefit for gold resulting in higher overall value for some time. Hamilton suggested we are “starting to see” that risk premium come into play. Even more jaded observers of world events are growing concerned about a possible grave conflict between the U.S. and Iran.
A separate CNBC.com article shared a client note from Jeffrey Currie, Goldman Sachs’ Global Head of Commodities Research. Mr. Currie addresses the potential of sudden geopolitical crises to provide longer-term support to gold. He noted the tendency of profound geopolitical conflict to further debase currency (because wars cost money). He said this is something to watch if tensions linger between the U.S. and Iran. Currie pointed out that “gold performed well, even controlling for real rates and dollar weakness, during the beginning of both Gulf wars and during the events of September 11, 2001.” Based on this, he said an “additional escalation in U.S.-Iranian tensions could further boost gold prices.”
A Record High for Gold this Year?
Just how high might prices go in 2020 based on geopolitical tensions?
Some analysts believe gold’s all-time high of just over 1,920 dollars per ounce in 2011 will be challenged soon. Barry Dawes, executive chairman of Martin Place Securities, went on the record saying the record price will be tested “probably by the end of the year.”
An Investing.com article pondered whether gold will “hit record highs this year on [a] Middle East showdown.” The article cites a report by John Roque, a Wolfe Research technical analyst. He believes gold will “make a new all-time high” in 2020 once it breaches what he sees as the next resistance level of 1,650 dollars per ounce.
From present levels, a rise in gold’s value to 1,920 dollars per ounce would represent a 23% increase. Price predictions are anything but certain, of course. But there is a great deal of favorable sentiment about gold’s prospects in 2020.
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A potentially worsening geopolitical climate could ignite gold to dizzying heights this year. Are you in a position to capitalize on it by buying gold (or more gold) for your own portfolio? Let Augusta help you get there.