Will Middle East Boost Gold?

Gold started the year well amid bad economic news from China and rising tensions in the Middle East. Will the conflict between Saudi Arabia and Iran boost the price of gold?

Yesterday, we focused on the Chinese stock collapse, arguing that it could be positive for the shiny metal, but investors would need to see evidence of a systemic crisis and strong contagion effects in the U.S. to change their bearish stance towards gold. In our October Market Overview, we wrote about the relationship between the Chinese slowdown and gold in a more comprehensive way. Here, we can only add that the Shanghai stock market stabilized yesterday due to the injection of $19.9 billion in short-term funds by the People’s Bank of China. The stabilization could be short-lived, but it will ease worries for some time, which is bad news for gold.

Today, we would like to write more about the relationship between the current tensions in the Middle East and gold. What is going on? On January 2, 2016, Saudi Arabia executed 47 people convicted of terrorism, including prominent Shiite Muslim cleric Nemer al-Nemer. As Iran is almost entirely Shia, the executions prompted Iranians to attack the Saudi embassy in Tehran. In response, Saudi Arabia broke diplomatic ties with Iran.

What does the recent turmoil in the Middle East mean for gold? Well, there may be some safe-haven demand for the yellow metal, especially if the tensions deepen or spread to other countries (a few other countries have already broken or downgraded diplomatic ties with Iran). In contrast to other tensions in the region, this conflict is between the two most powerful Islamic states in the Middle East, which could cause a stronger reaction in the gold market than usual. However, investors should remember that safe-haven rallies due to geopolitical reasons tend to be short-lived.

Summing up, the recent geopolitical situation in the Middle East deteriorated as the proxy war between Iran and Saudi Arabia escalated into something larger. If the tensions deepen or spread to other countries, we will see some safe-haven demand for gold. However, any positive impact should be only temporary and gold could again be traded mainly on news about the U.S. economy and the Fed’s actions.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor