Gold tends to fly in times of trouble. Not this time — so what’s going on? – Nationally
The war in Iran continues to weigh on global markets, but gold is not shining brightly at the moment even though many have long considered it a safe haven in times of crisis.
Gold prices fell nearly 4 percent on Tuesday to about $5,124 an ounce as of press time, with some experts attributing the decline to the strength of the U.S. dollar.
“The dollar is really roaring, and so is the US Treasury, and that gives a strong wind to gold and especially silver,” said independent analyst Ross Norman in an interview with Reuters.
Commodities such as gold and oil are bought in US dollars because they are considered the most used currency and are associated with the most powerful economies in the world.
This means that a stronger US dollar tends to lower the price of these goods because it takes fewer dollars to buy them.
“One of the problems with gold right now is that there has been such a run recently and speculation has reached fever pitch,” said Colin White, CEO of Verecan Capital Management.
“It’s very fragile right now at this point in time. So that’s what happens when you look at, ‘It’s always a safe place’ – there’s nothing all the time.”
The Iran conflict is affecting the world economy
On Saturday, the US and Israel launched strikes on Iran and sparked a new conflict in an already tense and tense Middle East region.
Concerns about how long this conflict may last and if things will escalate are potential investment reasons why the US dollar is becoming more attractive right now.
“When the world gets really, really, really, really, USD [U.S. dollar] seems to carry the day, doesn’t it? And that’s for no other reason than the USD,” said White.
“The whole world trades on confidence, right? So money flows where there’s confidence. And if there’s no other place to find confidence, the global vote is the USD, and I think that’s at play again this time.”
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This means that the US dollar is currently considered a stronger asset than gold, and reflects investor confidence in the US amid the Iran conflict.
At the same time, stock markets such as Wall Street were sold off in early trading on Tuesday.
Iran has launched strikes on US military infrastructure, embassies in allied countries such as Saudi Arabia, and nearby oil and gas facilities.
Iran has also effectively closed the Strait of Hormuz, a key shipping lane that sees a fifth of the world’s oil, by threatening any ships that try to pass through the area.
This threatens the world’s oil supply if the conflict continues, and if less oil is available, the price rises.
US President Donald Trump said on Monday that the conflict could last four to five weeks or more.
A barrel of crude oil was hovering around $74 as of press time, and that’s up nearly 20 percent from a low of $64 last Thursday.
While a stronger U.S. dollar may lead to lower oil prices, these supply concerns offset any potential discounts.
Then there is the risk of inflation brought on by high oil prices.
Prices of goods and services rise over time, known as inflation.
But the rate of inflation may accelerate as a result of the Iran conflict, experts say.
High oil prices often lead to more expensive fuel, including for cars, trucks, cargo ships, airplanes and other forms of transportation.
Businesses will often pass these higher costs on to consumers, increasing inflation.
“It definitely affects what you’re going to pay at the store, if you go to the mall, the stores, a lot of the economy is fueled by diesel, and gasoline prices are going up a lot,” said Patrick De Haan, a petroleum analyst at GasBuddy.
“So even though inflation has gone a long way, the attack on Iran has also started the wheels of inflation again as energy prices start to jump.”
The risk of high inflation is the reason why gold prices are falling.
If inflation rises, especially in the US, it is more likely that central banks such as the US Federal Reserve will be forced to raise interest rates to prevent prices from rising too much.
But this means that the US dollar will also rise because higher borrowing costs tend to attract more foreign investors and increase the value of the local currency.
That’s why gold prices are falling right now – expectations of higher US interest rates coupled with the risk of inflation from rising oil prices as the Iran conflict raises concerns that supplies could soon run out.
“People are trying to find a way and there’s a lot of uncertainty and markets hate uncertainty,” White said.
“There are different parts of the market where things are really optimistic about this. Some areas where people were a bit skeptical going into this. So that’s all playing into changing those perceptions and expectations right now. And it’s happening in real time and it’s scary and people make different decisions when they’re scared.”
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