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Israel’s war with Hamas puts new safe-haven focus on gold

Safe-haven demand is providing new bullish momentum for gold as investors react to Hamas’ brutal attack on Israel on Saturday.

Although safe-haven demand has not provided consistent, long-term support for gold, some analysts note that an escalation of tensions in the Middle East is just the latest geopolitical factor that will continue to support the precious metal into 2024.

Sunday, the Israeli government formally declared war and gave the green light for “significant military steps” to retaliate against Hamas after Saturday’s surprise attack that killed hundreds of Israelis.

Analysts note that the global economy and financial markets will remain sensitive to an escalation of the war. Political analysts note that growing tensions could pull Iran and the U.S. into the conflict, which could impact energy markets and inflation.

“It is difficult to predict the extent of the price action on geopolitical shocks. The fact that the U.S. and Iran are pulled into the turmoil hints that tensions may further escalate. From a price perspective, the $90pb level is expected to shelter decent offers in U.S. crude, as escalation and prolongation of Mid-East tensions could be the final straw that could bring the world very close to the brink of recession, and temper appetite for oil. It’s too early to call,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a note Monday.

However, while gold has the potential to run higher, Ozkardeskaya said that she doesn’t see a sustainable rally in the precious metal as long as bond yields remain elevated.

“The upside potential extends to a distant $2000 per ounce, but gains due to geopolitical tensions are not expected to last long. What will remain decisive for gold’s medium, long-term performance will be the U.S. yields. For now, they are on a rising path,” she said.

Analysts at CMP Group are also reluctant to buy gold on the latest rally as they don’t see this as a sustainable move.

“Issues in the Middle East are not expected to be resolved in the short-term, but the tensions from this weekend could deescalate. This, coupled with the healthy economic condition in the U.S. and any upside surprise on U.S. inflation data later this week, could push gold prices back down toward $1,820,” the analysts said in a note Monday.

Although gold prices could be volatile in the next few weeks, some analysts have said that the bigger picture of geopolitical instability continues to support the precious metal’s long-term uptrend.

In recent interviews with Kitco News, Michele Schneider, director of trading education and research at MarketGauge, said that rising food and energy prices worldwide create social unrest, leading to geopolitical instability.

Global rice prices are trading near their highest levels in 15 years as poor weather conditions have impacted the growing and harvest season. Not only is a lack of supply driving up prices, but it is creating significant food anxiety globally.

At the same time, gold will remain an important safe-haven as the U.S. dollar’s role as the world’s reserve currency continues to wane.

Edward Moya, senior market analyst at OANDA, noted that the new conflict in the Middle East comes as growing debt and deficits in the U.S. impact the bond market.

In an interview with Kitco News Friday, Moya noted that foreign investors already appear to be reluctant buyers of U.S. debt.

In a note on Monday, Moya said Israel’s war has created a new challenge, which could support gold prices.

“This won’t be an easy trade given the bond market is unsure how yields will react to the surge of U.S. bond issuance and fears of a widening Middle East conflict. The longer-term market impact with the Israel-Hamas war will depend on how involved Iranians were and how much the U.S. and international side get involved,” Moya said in the note. “A resumption of a bond market selloff had gold on the ropes, but geopolitical risks just gave it a lifeline. Gold now has a floor at the $1920 level and it seems it would take a perfect storm of hot inflation readings/expectations and for the big banks to deliver an upbeat outlook on the consumer, to reassert the bearish trend.”

Source: Kitco