Is Gold Losing Its Lustre?
In times of market turmoil and geopolitical unrest , gold is considered to be a safe haven with investors flocking to buy the yellow metal. However, at the close of business last Friday, gold extended its slide into a third consecutive week losing more than 6.00% and setting a record as its worst weekly performance since March 2020. Indeed, gold has shed more than 20% since the US/Iran/Israel conflict began and is currently trading at circa $4,400 – $4,435 per oz (showing great market volatility), from a high in late January of this year of just over $5,595 per oz.
The Impact of Monetary Policy and Inflation
Experts advise that gold is less appealing when interest rates remain high, and with energy costs surging due to the Middle East crisis, financial markets see the distinct possibility of interest rate hikes by central banks to ward off an increase in inflation. Both the Federal Reserve, the BOE (Bank of England) and indeed the ECB (European Central Bank), all held interest rates steady last week with money markets locking in bets for interest rate hikes this year by all three banks.
Central Bank Commentary and Market Expectations
In the Euro area, Joachim Nagel, a Governing Council Member of the ECB has said, “as things currently stand, it is conceivable that the medium-term inflation outlook could deteriorate and inflation expectations could rise on a sustained basis, meaning that a more restrictive monetary policy stance would probably be necessary”. There has been no official comment on interest rate hikes by the BOE, though they did highlight last Thursday concerns on the inflation front due to the Iran crisis. However, traders are betting on four interest rate hikes this year at 25 basis points per hike.
ETF Outflows and Comparisons to 1983
Despite escalating geopolitical risk and geo-economic fallout due to the Middle East Iranian crisis, gold has failed to capitalise on its status as a safe haven, with data showing net outflows for gold ETFs reaching circa sixty tons since the start of the Iranian conflict. Analysts suggest the rapid fall in the price of gold is due to investor profit taking combined with sales of gold due to a higher dollar and rising interest rates. The last time gold plummeted so sharply was in 1983, when oil revenues collapsed and Middle Eastern oil producers dumped gold.
Technical Support Levels and Market Volatility
Experts originally suggest that investors should look to a support level of $4,100 for gold if oil stays elevated, and an increase in bets on rate hikes by the financial markets keep ballooning. However, recently, gold briefly fell through the support level to $4,097.60, but as mentioned above it is currently trading in a range of $4,400 – $4,435 per oz. The gold market is experiencing extreme volatility as shifting investor sentiment and risk appetite, combined with algorithmic trading, continue to exacerbate price movements.
Geopolitical Outlook and Future Headwinds
The outlook for gold is based on the crisis in the Middle East, and if the situation moves towards a ceasefire, then rate hike expectations should diminish and should, experts say, trigger a recovery towards circa $4,800 – $5,000. Any movement in gold will also depend on the outlook from the Federal Reserve, with experts pontificating that if they look through the oil-driven inflation spike, it would remove a lot of the headwinds from gold. However, they went on to suggest that any increase in hawkish commentary would drive gold further down to new support levels.
The Long-Term Investment Case
A number of analysts suggest that the fall in the gold price is a tremendous opportunity for investors to start buying, especially a staggered entry for long-term buyers. Analysts look to previous bull runs in 1971 – 1980 and 2001 – 2010 which saw a number of retreats that did not nullify any potential gains. Therefore, experts are suggesting that when the Iranian conflict is over, and the pressure on interest rate hikes deflate, gold will probably resume its safe haven status and prices will accordingly head north. However, analysts warn that the pace of any recovery in gold could be impacted by how long it takes for supply lines to recover.
