Gold was able to advance above $5,500 this week as tensions with Iran and a weaker US dollar drove investors back into more traditional safe haven assets.
The move comes after a rise in the level of tensions in the Middle East following renewed security alerts and diplomatic strains associated with Iran’s regional activities. While blood is still empty, markets responded quickly. Gold prices went up as traders adjusted port folios to reflect risk geopolitics.
Gold has been used as a store of value at times when there is political uncertainty. And as the tension steps up, investors tend to pull back from equities and riskier assets, putting money in assets perceived to be more stable. That pattern seems to be playing out again, with fund flows shifting to bullion-backed exchange-traded products, as well as physical gold.
Currency markets have given impetus to the rally. The US dollar has weakened in the past few sessions, other than softer economic data, changing expectations regarding US monetary policy. Because the value of gold is measured in dollars worldwide, the value of gold portfolio investments rises when the dollar falls in value, because it becomes more affordable to international buyers, so there must be conditions in which this degradation of the dollar would help buoy demand.
The World Gold Council has noted in the past the role that the metal plays in times of instability. `“Gold’s savings characteristics tend to come to the fore at geopolitical and economic times of heightened uncertainty,” `the organization noted in its recent commentary on the global market (World Gold Council). Central bank demand has also been structurally strong in recent years, which cemented the place of gold in the world’s reserves.
The price level has wider signals for the financial markets. A prolonged increase in the price of gold is often indicative of a more general “risk-off” movement in investor sentiment. Global equities have been traded unevenly, and energy markets are closely following what happens in the Middle East. Currency volatility has returned as traders review exposure to emerging markets and also to commodity-linked economies.
Gold’s advance is by no means alone. It represents a combination of both geopolitical caution and weaknesses in the currency and portfolio hedging. For foreign investors, the metal is a hedge against unexpected shocks. For both policymakers and central banks it is a strategic reserve asset in times of uncertainty.
The “break above $5,500” highlights the speed with which World capital can reconfigure itself at a time when geopolitical tensions are bringing “battle” and the dollar is weakening. Rather than a sign of speculation, the move reflects gold’s relevance once again in a world with political risk, currency fluctuations and Dove’s faltering investor confidence.