Oil and gold are being sold due to uncertainty in the Middle East
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Uncertainty regarding the development of the situation in the Middle East is forcing investors to return to defensive assets. Gold quotes hit a one-and-a-half-week high, rising to almost $1,880 per troy ounce. The risks of the conflict spreading also affect the oil market, which is actively recovering from the September collapse. In the absence of further escalation of the conflict, prices for gold and oil may decline, but only slightly: a longer-term factor also has an impact – expectations of the end of the Fed rate hike cycle.
After a two-week decline and reaching a six-month low, gold quotes began to regain their positions. According to Investing.com, the price of gold on the world market rose to $1,879 per troy ounce, which is almost 1% higher than Monday’s values. Relative to the local minimum set on Friday, the price increased by more than 3%. Price increases were also observed for other precious metals. Thus, the price of silver reached $22.1 per ounce, having increased over 5% in three days. Platinum quotes increased by 5% and came close to $900 per ounce. Palladium added 3.2% in price, reaching $1,778.3 per ounce.
The price of gold rose amid hostilities between Israel and the Palestinian group Hamas. In such conditions, international investors returned to investing in protective assets, primarily gold, the role of which increases during periods of growing geopolitical risks. However, as Sovcombank chief analyst Mikhail Vasiliev notes, “this support factor will be short-term if the conflict remains local and fades over time.”
The risks of potential intervention by Iran in the conflict, as well as the spread of the conflict to nearby oil fields, have affected the oil market, notes Digital Broker analyst Daniil Bolotskikh.
On Monday, the price of Brent on the spot market rose by more than 4%, to $89.71 per barrel. Even taking into account the correction that followed on Tuesday, prices stopped at $88.3 per barrel, which is still almost 4% higher than Friday’s closing value.
An additional factor in the growth of commodity prices was the depreciation of the dollar on the world market. On Tuesday, the DXY index (the dollar exchange rate against six leading currencies) fell to 105.66%, which is 0.3% below Monday’s closing values and 1.6% below the local maximum set a week earlier. This movement of world currencies was facilitated by rather soft statements from Fed representatives that the recent increase in government bond yields may mean less need for further tightening of monetary policy. As a result, as Mikhail Vasiliev notes, the probability of a Fed rate hike in December, according to the futures market, fell to 25% from 42% a week earlier. In response, the yield on ten-year US Treasury bonds (UST) dropped to 4.61% per annum, having lost almost 12 basis points since the beginning of the week. “Gold competes with other safe haven assets such as dollar deposits and US Treasuries. Therefore, the stronger the dollar’s position and the higher the dollar interest rates, the lower the demand for gold, and vice versa,” notes Mr. Vasiliev.
In the absence of further escalation of the Middle East conflict, it is the monetary policy of the American regulator that will determine the situation on the gold market.
Mikhail Vasiliev does not exclude the possibility that if the Fed rate hike cycle is completed, the price of gold may rise to the range of $1900–1950 by the end of the year. Analysts also expect a rise in prices on the oil market, which, according to Daniil Bolotskikh, will be facilitated by a record shortage of raw materials since 2007, at the level of 3.3 million barrels per day. On the other hand, significant risks remain that high interest rates in the US and Europe will push the global economy into recession in the coming quarters. “These expectations, in our opinion, will restrain the rise in oil prices significantly above $90 per barrel,” predicts Mr. Vasiliev.
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