In May this year gold shot through the $2,000 level to $2,051. But shortly after the price cratered and by 5 October it hit $1820.
Since then, the gold price has jumped again.
In fact, gold is at its highest point in the past three months right now. It is up 8.5% currently circling $1,997…
What’s behind the jump in the gold price?
The sharp rise in the gold price can be attributed to one main event.
The Israel-Gaza conflict.
You see, gold prices tend to skyrocket when there is war.
Geopolitical tensions have a significant impact on the performance of gold. The yellow metal is considered a safe-haven asset to investors in times of uncertainty, instability, and geopolitical crisis. There are several reasons why geopolitical tensions can affect the price and performance of gold.
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.
Elevated risks in the Middle East are prompting safe-haven demand for gold.
The Israel conflict has a high risk of growing out of control
The risk of the current Palestine/Israel conflict isn’t as big as Russia/Ukraine.
However, it can easily grow to a beast that it out of control.
You see, Iran has made threats that it could join in against Israel.
As Israel appears to be preparing to invade Gaza, Israeli forces and the Iranian-backed militant group Hezbollah are firing at each other at the Lebanon border.
According to an analysis published in the New York Times: “If Hezbollah decides to take advantage of the overstretched Israel Defense Forces and officially open up a second front on Israel’s northern border, the situation could escalate — and deteriorate — quickly. Even the slightest miscalculation by Iran or one of its proxies could result in a dramatic response by the Israelis, potentially pulling in the United States and setting the stage for a bitter regional conflict.”
Should this happen there’d be catastrophic rises in the oil price. Iran, and possibly Iraq could weaponise oil to create economic pain for the US.
Iran produces 3.5 million barrels of oil per day, and Iraq around 4.5 million barrels per day – combined this is nearly 10% of the world’s total oil supply.
What’s the chances of full-on war?
Iranian Foreign Minister Hossein Amir-Abdollahian said that a political settlement of the situation in the Gaza Strip is becoming increasingly unlikely, and Tehran warned it may take “pre-emptive action” against Israel.
That said, it is in no one’s best interest for a full-on war to break out in the middle-east.
According to a Euronews report: “The Iranians, despite their fiery rhetoric, probably don’t want a regional conflict.”
“If we go into a full-scale war, the US and Israel will probably see this as an opportunity to destroy Iran’s nuclear programme, which is closer than ever to developing nuclear weapons. This will come at a huge cost, military capabilities, and possibly huge human casualties.”
Does this mean gold will continue heading up?
While there’s lots up upward momentum for gold because of the geopolitical situation, there’s also downward pressure on gold…
You see, the US in its fight against inflation has been raising rates. That’s also seen bond yields increase. Just in the past month the US 10-year edged toward the 5% level.
It is the highest the bond yield has been since 2007.
High bond yields mean investors can get good income from bonds, at a reasonably low level of risk.
And that means cash flows out of gold – and into bonds.
Right now the upward momentum from geopolitical risks is more than the downward pressure from increasing bond yields.
But this can change any day. If peace is brokered in the middle-east – expect a $100 drop in the gold price.
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