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War With Iran Begins: Gold Hits $1,600

Written by Luke Burgess
Posted January 8, 2020

For the first time since 2013, the price of gold rallied overnight, hitting $1,600 an ounce after it was reported that more than a dozen Iranian missiles were fired at a U.S. military base overnight in Iraq.

Safe-haven buyers wisely began purchasing gold last week following the assassination of Iranian Major General Qasem Soleimani, which is assumed to have prompted last night's attack. Since then, gold has increased by over $80 an ounce, or almost 5%.

From here, we should only expect gold prices to creep higher.

Gold (5 Day)gold1/202

Initial reports said there were no deaths or injuries in the Iranian missile strike. However, the Pentagon said it was still evaluating damage — so deaths and injuries may be reported later.

Casualties from the bombing will most likely dictate the speed of the American response. Yet as a direct attack on U.S. soldiers, there's little doubt that Washington will respond.

In other words, it's pretty clear now that we're going to war with Iran.

And that will mean market changes for commodities like oil and gold.

For oil, it's likely those changes will be more perceived than real. That's because while Iran is a major oil producer, it barely makes it into the world's top five largest oil suppliers, just slightly beating out China and Canada. The United States is, in fact, the world's largest oil producer (and consumer) today.

Besides, there are already sanctions on Iranian oil exports. In April 2018, Iran exported 2.5 million barrels of oil per day. But hit by sanctions back in July, the country was only exporting 100,000 barrels per day.

On top of that, investors who are rushing to buy oil now seem to forget there is a global glut in crude supplies that's expected to last through at least the first quarter of this year.

Point is, a war between the U.S. and Iran exclusively won't affect global supplies as much as most people would believe. Still, the perceived fear of the war's effect on world oil supplies will likely serve to buoy prices.

Gold, on the other hand, is different.

Firstly, there is no abnormal glut in gold supply. So increased demand will have more of an effect on gold prices than oil in the end.

Secondly, there's no OPEC of gold that can quickly ramp up production to meet demand.

It's well known that OPEC wants oil prices to be within a range. Of course, they don't want oil prices too low. But they also don't want them too high where alternatives are easily economically competitive. So whenever oil prices get too high for them, they just open the taps and watch the money flow in. But there's no organization like OPEC controlling gold supply.

Also, important to note, Iranians gold love.

As an American, you wouldn't (or shouldn't) be blamed for not seeing much of a difference, but Iran is completely different from the rest of the Arab World. In fact, most of the Iranians I've met in my life don't even want to be called “Arab.” They're Persian.

Iranians have a completely different language, history, and a unique culture compared to the rest of the Arab world. And, most important to my point here, in that culture is a particular affinity for gold.

Iran is one of the largest gold consumers in the Middle East. Like everyone else in the world, Iranians buy gold for both its beauty and save haven quality. As such, we can expect much heavier demand for gold from Iran and, by extension, the rest of the region in the face of an active war.

Lastly, and maybe most important, gold is being used as a safe haven vehicle again.

The common perception is that gold is a safe haven vehicle, period. End of story. But I can tell you from over 15 years of trading the metal, that's not exactly the end of story.

The overall appetite for safe haven assets rises and falls over time with geopolitical and currency crises and resolutions. But at the same time, the perception of gold as a safe haven asset also ebbs and flows.

In short, sometimes gold is very much considered as a safe haven asset — other times, not so much.

Following the sharp correction in gold prices starting in 2011 and ending in late 2018, it seems there was little to no safe haven interest in gold. In fact, gold's very essence as a safe haven asset was being questioned in late 2018. I wrote about it here.

Safe haven interest was declining in general, of course, with the U.S. economy on the rise during this time. But social/civil unrest and geopolitical uncertainty stemming from everything from Brexit to the Charlotte riots... even the Iranian nuclear deal... it was all but ignored by gold.

Then, sometime early in 2019, gold began to regain its safe haven status. This was mostly evident following the Iran drone strike in July and the attack on the Saudi oil plant a few months later. Buyers sought gold following both incidents, edging up prices.

So we're in a market environment where there is a growing appetite for safe haven assets, and there is growing interest in gold as a safe haven asset. That and everything else considered, I think there's no reason for gold not to continue to tick even higher from here.

Stay long gold.

Until next time,
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Luke Burgess

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As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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