Gold, traditionally seen as a “safe haven” when it comes to investment, had its worst week since 1983 amid uncertainty stemming from the Iran war.
The war’s impacts have already been seen in surging oil and gas costs, with prices hovering around and above $100 a barrel. On Friday, they went to $112 for a barrel of Brent crude.
Now, this week, gold dropped 11%, closing around $4,497 per ounce as of Friday afternoon.
The week started off at $5,023.53 an ounce — but that changed Wednesday, when the Federal Reserve announced it is holding interest rates steady.
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Gold’s gone down every week since the war in Iran started with joint U.S. and Israeli airstrikes on Feb. 28.
Data compiled by Bloomberg shows that holdings in Bullion-backed Exchange Traded Funds have fallen more than 60 tons in the last three weeks.
This contrasts with earlier this year, when gold prices hit all-time highs and even went past $5,000 an ounce
Financial traders, in response to the Iran war’s effect on oil prices, are bracing for central banks to raise interest rates with the aim of curbing inflation, according to BullionVault. This would hurt gold, as it doesn’t pay interest.
“Gold and silver are caught in a wider market panic, selling off as traders rush to cut losses and risk,” Adrian Ash, director of research at BullionVault, said in an analysis report.
Margin calls, a rise in value-at-risk and changing market expectations for U.S. interest rates were three aspects Ash said contributed to gold’s decline in March.
“The irony is stark: gold is being sold during an active Middle East conflict precisely because the oil shock from that conflict is reigniting inflation and forcing the Fed to stay hawkish,” analysts Gary Wagner and Joseph Wagner wrote for Kitco News. “Higher oil means higher inflation, higher-for-longer rates — and gold suffers despite the geopolitical backdrop that should theoretically be its greatest ally.”
Aakash Doshi, global head of gold and metals strategy at State Street Investment Management, told MarketWatch that there’s also been a rebound in the U.S. dollar and profit-taking, as well as some people using gold as a “liquidity sleeve to raise cash.”
Experts say gold prices and the U.S. dollar usually have an inverse relationship, as it is dollar-denominated in global trade. If the dollar is weak compared to other countries’ currencies, gold is less expensive for foreign buyers.
Last month, gold prices above $5,200 attracted a lot of buyers, which left the market vulnerable to correction, Rhona O’Connell, an analyst at StoneX Financial, told Bloomberg. Once prices fell, investors hit stop-loss levels, which are automatic instructions to sell if prices drop to a certain point, causing selling to accelerate, O’Connell said.
Adrian Day, president of Adrian Day Asset Management, said in an interview with Kitco News that while “sentiment has changed, and the market is focused on the negatives,” like central banks being more reluctant to cut rates, he added that “This is only temporary, in my view.”
Day believes the U.S. economy is headed toward a recession, meaning the Fed will have to loosen policy again.
“It may be another round of [Quantitative Easing] rather than significantly lower interest rates,” Day said to Kitco, “but it would still have an equally positive impact on gold.”
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Russ Mould, investment director at AJ Bell, said gold might still rebound, based on historical precedent.
“Gold’s status as a haven may now be tarnished in the eyes of some as the precious metal is falling in price, even as war roils the Middle East and financial markets alike, and some may even be tempted to say that the third major bull run in the commodity since 1971 is now over,” Mould said in Investing.com. “Neither interest rates staying higher for longer nor a stronger dollar may help the investment case for precious metals, but both the 1971-1980 and 2001-2010 bull runs saw several retreats which did not ultimately nullify or prevent major gains, so it may be too early to give up on gold just yet.”
