Shift in Middle East Tensions Influences Gold and Safe-Haven Asset Demand

This recent violence flaring up in Israel last weekend quickly gave rise to safe-haven asset demand as investors moved their portfolios around to place more weight on secure commodities like gold. As geopolitical tensions in the Middle East continue to tighten, all eyes are watching closely to gauge market risks.

On Sunday, attackers from the group Hamas of Palestine entered Israel in an unannounced attack. The United States, leading numerous other Western nations, denounced the action and took Israel’s side.

U.S. President Joe Biden expressed “my full support for the people of Israel in the face of an unprecedented and appalling assault by Hamas terrorists.”

Hamas took this action as “an actual participation in the aggression against our people,” potentially igniting additional conflict.

The rising tensions subsequently boosted demand for safe-haven assets, like gold, as well as the U.S. dollar. U.S. Treasuries also saw a spike in demand rates, with major sell-offs happening over the weekend.

“This is a good example of why people need gold in their portfolios. It is a perfect hedge against international turmoil,” Peter Cardillo, the chief market economist at Spartan Capital Securities, explained. Cardillo also predicted that the dollar would see demand spikes.

“Anytime there is international turmoil, the dollar strengthens,” Cardillo continued.

The news overseas allowed gold to gain over 1% by Monday, boosting it from its recent seven-month low hit late last week. The precious metal spiked from $1,831.80 per ounce on Thursday to $1,873.60 per ounce on Tuesday, showing significant gains immediately after the attack.

“Gold has regained its safe-haven status following the geopolitical events over the weekend,” Matt Simpson, a senior analyst at City Index, explained.

The recent expectations of interest rates staying higher for longer pushed gold down prior to this weekend’s rise, contributing to its seven-month low last week. After recent economic data, analysts believe interest rates may stay up well into 2024. Gold typically doesn’t excel during periods of high interest rates, so the recent political tensions offered the precious metal much-needed support.

“We see the potential for gold to head for $1,880, but unless we see bond yields move materially lower, I doubt it can break $1,900 any time soon,” Simpson continued.

In the midst of the high rates and rising tensions, the U.S. dollar continued excelling, and stocks stabilized after numerous losses. Many analysts now have their eye on oil prices as well, which just skyrocketed more than $4 per barrel in Asian markets on Monday.

“Whether this is a massive market moment or not depends on how long it lasts and whether others are sucked into the conflict,” Brian Jacobsen, the chief economist at Annex Wealth Management, weighed in.

Iran’s ally, Hezbollah, and Iran both supported the Hamas attack. With the U.S. going against the attack, we may see a drastic cut-off in oil supply.

“Iranian oil production has been increasing, but any progress they’ve been making behind the scenes with the U.S. will be dramatically undermined by Iran’s celebrating Hamas’ actions,” Jacobsen continued, adding that “the possible output loss matters, but it won’t be earth-shattering.”

“It’s most critical to see how Saudi Arabia reacts,” Jacobsen explained. The U.S. wants to create a deal that would build ties between Saudi Arabia and Israel.

Regardless of what occurs here, it’s clear to see how the attack has affected the globe on a widespread scale. Aside from the obvious impact on local communities, the event immediately caused rippling effects on stock markets, gold prices, global travel, and more. Even U.S.-based airlines have already stopped travel to Tel Aviv, including United Airlines, Delta Air Lines, American Airlines, and Air France.

“The price the Gaza Strip will pay will be a very heavy one that will change reality for generations,” the Defence Minister of the town of Ofakim, Yoav Gallant, explained. The attack killed hundreds, leaving many injured and displaced.

David Kotok, a chair and chief investment officer at Cumberland Advisors in Sarasota, Florida, believes the situation is especially concerning in the United States given the nation’s already weakened state. If more conflicts arise, the U.S. may not be in a state to respond accordingly.

“I am very worried about more explosive situations that require U.S. determination and U.S. defense capability, which is being injured,” Kotok explained.

If such “explosive situations” were to arise, we could see more safe-haven demand spiking for commodities like gold. As always, investors should consult their financial advisors before making any portfolio decisions.

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