Gold is the world’s ultimate historical safe haven and it has been a rare beneficiary of today’s mounting horrors.
The price has clicked up 2.5 per cent in the last week, but this can hardly be described as a gold rush.
At the time of writing, it was trading at slightly more than $1,979 an ounce. That is some way below this year’s peak of $2,048.45, which gold hit during the banking crisis in April.
It is even further from its coronavirus-driven high of $2,074.88, set in August 2020.
Surprising? Maybe. Yet, gold is more than a simple store of value and its price is driven by a number of factors. War, war does not always mean soar, soar.
If it did, the gold price would be heading to the moon as Israel prepares a ground invasion of Gaza and US President Joe Biden threatens to hold Iran “accountable” for supporting Russia, Hamas and “other terrorist groups”.
Could the world be more worried? Well, it might be, given what is coming our way, but war is only one of three factors driving the gold price.
The other two are the US dollar and interest rates.
Gold is priced in dollars and when the greenback is strong, that makes it more expensive for buyers of other currencies, hitting demand in key markets such as China, India and Turkey.
With the US Federal Reserve considering further interest rate increases as it battles to curb inflation, the dollar is on the march again. Plus, it is also a safe-haven play, currently eclipsing gold.
Interest rates matter because gold does not pay any income. That makes it less attractive when bond yields rise as they are today, with 10-year US Treasuries paying about 5 per cent.
That is the highest level since 2007 and the higher yields climb, the more it will hurt gold, says Ricardo Evangelista, senior analyst at ActivTrades.
“As bond yields and savings rates rise, the opportunity cost of holding non-yielding gold in your portfolio has increased,” he says.
So, two of the three factors driving the gold price are pointing the wrong way right now, Mr Evangelista says.
“Gold prices may climb higher once investors sense that interest rates have peaked, but this is not guaranteed.”
Gold’s recent gains are impressive considering the “negative price signals” of the rising dollar and interest rates, says Ole Hansen, head of commodity strategy at Saxo Bank.
It is even more impressive as holdings in bullion-backed exchange-traded funds decline, as asset managers hang back waiting for peak interest rates.
Mr Hansen suggests that at some point, “we will see a fear of missing out [Fomo] buying response” that could drive gold higher.
Fawad Razaqzada, market analyst at City Index and Forex.com, also calls the gold price resurgence impressive but warns that the yellow metal may now be overbought after breaking through key resistance levels.
“What I would like to see now is a period of consolidation and some give-back, just to see if buyers will step in,” he says.
He reckons gold has reached a potential resistance zone right now at around $1,960 to $1,980, which it struggled to break during the summer.
If sellers return in force, the gold price could “slice through this zone like butter”, he says.
Much now depends on Gaza, but not as much as many investors assume, says Carsten Menke, head of next-generation research at Swiss private bank Julius Baer.
“Geopolitics is typically a temporary noise element rather than an impactful fundamental force, and outside of the two oil crises, gold and silver do not possess a particularly strong track record as geopolitical hedges,” he says.
Mr Menke is a rare optimist these days, arguing that higher interest rates are a healthy sign of normalising economic conditions and markets could rally as the year draws to a close.
He also notes that speculative gold and silver traders have been wrong-footed twice in recent weeks.
“Betting on higher prices, they were caught out as the long-awaited US recession did not materialise and the Federal Reserve suggested interest rates would remain higher for longer.”
After adjusting their positions to bet on falling prices, they were caught a second time by the Hamas attack, Mr Menke adds.
While gold and silver jumped on the initial geopolitical shock, as they always do, we cannot assume this will continue.
“In the past, conflicts between Israel and Hamas have not moved the gold and silver markets for long,” he says.
This could change if the conflict spreads or threatens oil supplies, but Mr Menke remains optimistic.
“While we cannot rule out an escalation, we have a very high conviction in the established economic trends: No recession in the US, higher-for-longer interest rates and no systemic banking stress. These trends should result in a further fading of safe-haven demand,” he says.
If correct, the gold price could decline and today’s buyers could find themselves sitting on a loss.
However, asset price movements are impossible to predict with any accuracy, given all the variables, and that applies to the gold price, too.
As ever, views differ with Fitch Solutions “neutral” about the gold price, expecting prices to average around $1,950, slightly below today’s levels.
In contrast, Reuters technical analyst Wang Tao reckons gold will extend recent gains “into a range of $1,998 to $2,010 per ounce, as it has broken a resistance at $1,972”.
Gold could go either way from here but if the fear factor continues to climb, a new high could be in reach.
If the war intensifies, oil prices soar, the world hurtles into a recession and central banks are forced to slash interest rates, gold could dazzle.
Shoppers in Dubai Gold Souq – in pictures
Day traders may dabble but most private investors should tune out the noise and build a balanced portfolio designed to withstand whatever the world throws at us next.
Standard financial advice is that every investor should have some exposure to gold in their portfolio, but typically no more than 5 per cent or 10 per cent of the total.
That advice still holds, even if very little else does, in today’s turbulent, terrifying world.