The Iran war continues to roil global markets, but gold isn’t shining so brightly right now, even though many have long considered it a safe haven in times of crisis.
Gold prices fell nearly four percent on Tuesday to around $5,124 an ounce, according to the release, and some experts attribute the drop to strength in the US dollar.
“The dollar is absolutely roaring, as are US Treasuries, and that provides a strong headwind for gold and particularly silver,” independent analyst Ross Norman said in an interview with Reuters.
Commodities such as gold and oil are priced in US dollars because it is considered the most widely used currency and is associated with the world’s most powerful economy.
This means that a stronger US dollar generally lowers the price of these goods because it takes fewer dollars to buy them.
“The problem with gold lately is that it’s had such a run lately and speculation has reached a fever pitch,” says Colin White, CEO of Verecon Capital Management.
“It’s more vulnerable at this point in time. So it kind of goes in the face of, ‘This is always a safe haven’ — nothing is always nothing.”
The Iran conflict will affect the global economy
On Saturday, the US and Israel launched attacks on Iran, sparking a new conflict in an already tense and volatile Middle East region.
Investment experts say that the US dollar is becoming more attractive now because of how long this conflict can continue and the possible reasons if things escalate.
“When the world is really, really, really, really scary, the USD (US dollar) seems to carry the day, right? And for no other reason than the USD,” says White.
“The whole world trades on the basis of confidence, right? So where there is confidence, money flows. And when you have nowhere else to get any confidence, the global vote is the USD, and I think that’s playing out again this time.”
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This means the US dollar is currently considered a stronger asset than gold and reflects investor confidence in the US amid the Iran conflict.
At the same time, stock markets such as Wall Street sold off in early trading on Tuesday.
Iran launched counterattacks on US military infrastructure, embassies in allies such as Saudi Arabia, and nearby oil and gas facilities.
Iran effectively closed the Strait of Hormuz, a key shipping route that sees one-fifth of the world’s oil, threatening any ships that try to pass through the region.
This threatens the world’s oil supply, as the conflict drags on and when less oil is available, the price rises.
US President Donald Trump said on Monday that the conflict could last four to five weeks or more.
A barrel of crude oil was around $74 as of the release, up nearly 20 percent from a low of $64 last Thursday.
While a stronger US dollar could lead to lower oil prices, these supply concerns offset those potential discounts.
Then there is the risk of inflation that higher oil prices bring.
Prices of goods and services increase over time, which is called inflation.
But experts say the rate of increase in prices could accelerate as a result of the knock-on effect of the Iran conflict.
Higher oil prices often result in more expensive gasoline for cars, trucks, cargo ships, airplanes, and other forms of transportation.
Businesses often pass these higher costs on to consumers, which drives up inflation.
“Obviously you’re going to pay at the grocery store, when you go to the mall, the retail stores, most of the economy is fueled by diesel, and diesel fuel prices are certainly jumping more substantially,” says Patrick DeHaan, petroleum analyst at GasBuddy.
“So inflation is far from over, attacks on Iran will start inflationary cycles again when energy prices start jumping in response.”
The risk of high inflation has also caused gold prices to fall.
If inflation rises, especially in the US, there is a greater chance that central banks such as the US Federal Reserve will be forced to raise interest rates to prevent prices from rising too high.
But this means the US dollar will also rise as higher borrowing costs attract more foreign investment and increase the value of the local currency.
This is why gold prices are falling right now – expectations of higher interest rates in the US are linked to inflationary risks from rising oil prices, as the Iran conflict raises concerns that supplies could soon run out.
“People are trying to find direction and there’s a lot of uncertainty and markets hate uncertainty,” says White.
“Things are really optimistic in different parts of the market. Other places where people were pessimistic go to this. And now it’s playing into changing those perceptions and expectations. And it’s happening in real time and it’s scary and people make different decisions when they’re scared.”
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