Throughout the conflict in the Middle East, gold has moved in tandem with risk assets and has shown a negative correlation with oil and the dollar. Unsurprisingly, Tehran’s announcement that it was opening the Strait of Hormuz triggered a surge in gold to monthly highs, whilst the US seizure of an Iranian tanker caused the precious metal to take a step down.
Markets are gradually growing weary of geopolitics and are beginning to consider the consequences of the conflict in the Middle East. Investors are asking: how high will inflation rise and how long will it last? Rapid consumer price inflation will force central banks to raise rates aggressively, which is negative for gold. Standard Chartered forecasts that the average price in the second quarter will fall to $4,605 per ounce before rising to $4,850 in the third.
However, if the Fed considers the inflation surge to be temporary, it will not tighten monetary policy. A fall in real Treasury yields could provide a tailwind for gold. Alongside monetary policy, HSBC cites central banks’ insatiable appetite for bullion, as well as concerns over the US budget deficit and financial stability, as drivers of growth.
Despite gold’s sensitive reaction to news from the Middle East, it stands to benefit from both an end to the conflict and its extension. In the former scenario, inflation will not rise as high as feared, and central banks may abandon plans to raise rates. In the latter scenario, persistently high oil prices will deal a serious blow to the global economy, forcing central banks to focus on the risks of recession. And in such circumstances, they typically throw the economy a lifeline through large-scale monetary stimulus. This will create a favourable environment for rising precious metal prices.
