How Does US-Iran Conflict Shape Global Gold Prices?

In January, the price of gold surged past US$5,000 per ounce for the first time in history, but with ongoing uncertainty, it is continuing in an upward trend.

Geopolitical and economic turbulence is driving material cost shocks that are reshaping sourcing strategies and entire industries, such as mining. 

Now, the escalating US-Iran tensions have caused the price of gold to surge once more.

The mining market

The US and Israeli strikes on Iran have resulted in mass shocks across global markets, intensifying instability across an already turbulent environment. Amid escalating conflict, investors are seeking safe-haven assets, such as gold. Due to the tensions, the price of gold reached US$5,614.53 per ounce on 1st March, according to Gold.co.uk. 

Safe-haven assets are investments that are expected to retain or increase in value amid periods of market volatility or geopolitical turmoil. They typically offer high liquidity, safety and lower risk – historically, gold has been seen as the primary safe haven, thriving due to inflation.

Following the missile strikes on Iran, launched by the US and Israel, as well as Iran's retaliation, the market leapt into action. Oil prices rose dramatically, with stocks being sold off, resulting in stock markets down two percentage points. Safe haven bids meant that hold and other precious metals have grown

“I think you’re going to see a knee jerk spike up in most commodity markets, including gold and oil. This will be a natural response to the outbreak of hostilities, which was rather unexpected in terms of scale and scope,” says Edward Meir, analyst at Marex.

“I think we could open up by about US$200 per ounce on gold, but then drift lower over the course of the day. The markets are rather dispassionate when it comes to military conflicts; the only thing investors are ultimately focused on is whether the oil flows will be interrupted so once the initial spike is over, the initial rally tends to fade.”

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Mining gains

According to analysts at Natixis, the conflict in Iran could add up to 15% to the gold price, whereas JPMorgan analysts point towards a 5-10% increase.

As gold climbed to record highs, precious metals miners led gains in London. FTSE 100 gold producer Endeavour Mining PLC, Fresnillo PLC, the Mexican silver and gold miner, and Pan African Resources PLC, the South Africa-focused gold company, all saw early deals as gold surged in price on the 2 March.

Pan African was up 4% in early trading, with Endeavour rising 4% and Fresnillo seeing a 2% gain. 

Tim Waterer, Chief Market Analyst at KCM Trade says: “Gold is likely to be in higher demand than usual when markets open on Monday. Given the risks regarding how long the conflict may last, which other nations could be dragged in, and inflation fears, gold is expected to assume its mantle as the safe haven asset of choice.

“Stock markets and other risk assets will probably be sold off and investors will be looking for the best place to park their funds, and gold will likely be atop that list.”

The wider impact

As investors increasingly back gold to withstand market, investing into the commodity, gold miners will surely see the benefits. While the price of gold rises during volatility, the businesses ensuring this product reaches market will gain solidity. 

On 2 March, Australia's gold mining majors gained approximately US$4.9bn as the metal saw growth in prices. The top three by market capitalisation saw significant gains – Northern Star Resources (4.8%), Evolution Mining (6.5%) and Greatland Resources (4.6%). 

“There is no doubt this is a worrying escalation and one that will drive investors into precious metals and the energy sector," explains Ole Hansen, Head of Commodity Strategy at Saxo Bank.

"How big the impact will be is anyone’s guess but given last week’s momentum I would not be surprised if gold prints a fresh record high.”

The impact of the war on trade cannot be stressed enough, but how long the surge lasts for will depend on how swiftly the conflict meets its end. Geopolitical events seem to have been never-ending throughout the last 12 months, having an impact on every sector, from mining and manufacturing to retail. 

If the conflict lasts, the position of gold may remain a highly sought-after asset of choice. With tensions rising further, the market is sure to see significant disruption across supply chains.