Is Gold the Asset To Own amid US-Iran War Threat?


Jan. 8 2020, Updated 8:44 a.m. ET

The traditional safe haven, gold, continued to rally amid rising geopolitical tensions recently. The spot gold prices crossed the $1,600 per ounce level on Wednesday for the first time in seven years. Iran retaliated, attacking US forces in Iraq after the latter killed Iran’s top military general last week.

The war-like situation in the Middle East resulted in a broad sell-off in the stock markets globally. The Dow Jones (NYSEARCA: DIA) and the S&P 500 (NYSEARCA: SPY) fell around 0.5% each from their respective record-highs amid increased geopolitical risks. However, the metal continued to shine from late December and has increased more than 5% so far in 2020.

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Gold continues to shine bright

Market participants turn to defensive investments like gold and bonds amid uncertainties. According to CNBC, UBS commodity strategists expect the metal to rally for the rest of 2020, given the geopolitical risks and other macro factors. This is the second consecutive year of the metal’s upbeat movement after a decent rally last year. Recession fears and escalating US-China trade war pushed investors towards gold in 2019. Also, negative interest rates, mainly in the Eurozone, made the metal an attractive safe-haven investment option.

US dollar has been trending downwards from Q4 2019 which has boosted gold prices. Gold prices and the US dollar generally trade inversely to each other. As the price of bullion is denominated in US dollars, the weakness in the US dollar increases its affordability in terms of other currencies, resulting in an increase in yellow-metal prices.

Additionally, the metal will likely remain attractive, as per the UBS strategists, mainly due to negative interest rates. In such a scenario, inflation is higher than the nominal interest rates and creditors most likely turn to the safe-haven commodity.

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Rising geopolitical tensions

Recent US-Iran worries put a spotlight on crude oil as well. The subdued energy commodity prices exhibited a huge surge of late amid the tensions in the Middle East. However, Goldman Sachs thinks gold as a better hedge against oil given the latest tensions, CNBC reported.

Spot gold prices rose by about 10% in the last month and peaked at $1,611 per ounce on Wednesday. The metal seemed to have lost its sheen before last year’s rally. However, broad market volatilities kept investors on the edge and it once again came back shining bright. Notably, since last June, gold prices have surged more than 25%, beating the Dow Jones Index.

Top gold mining companies

Recently, the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) has seen a notable upbeat movement. The ETF offers exposure to gold miners across the globe. It rose more than 40% in the last 12 months. Barrick Gold (NYSE: GOLD) and Newmont Goldcorp (NYSE: NEM) are some of the top holdings in the GDX ETF.

These stocks have a moderately positive correlation to gold prices. Higher precious metals prices last year boosted these miners’ earnings compared to 2018. Stocks of these top mining companies Barrick stock and Newmont surged 43% and 26% respectively in the last 12 months.

While a big fall in gold (NYSEARCA: GLD) prices seems unlikely at the moment, the rally might slow down in the short term. How Iran and the US play out in the next leg of this war-like situation remains to be seen. Importantly, any further escalation in tensions could bode well for gold.

If you are a beginner and want to learn more about investing in precious metals, read A Beginner’s Guide to Gold and Silver Investing.


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