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Below the Views on Gold: A moderate reaction to the Israel-Iran war by Carsten Menke, Head Next Generation Research, Julius Baer 

The gold market’s reaction to the escalating conflict between Israel and Iran remains very moderate. Barring a severe economic impact or a spreading in the region, we do not expect the conflict to lastingly lift prices, in line with the historical pattern. That said, the fundamental backdrop is favourable, and we therefore reiterate our Constructive view on gold.

The ongoing conflict between Israel and Iran continues to hit the headlines at the beginning of the week. Meanwhile, the reaction in the gold market remains moderate, with prices up less than 1% since before Israel’s initial attack. We assume that this reaction has been driven by some speculators and automated trading systems in the futures market rather than by physical safe-haven demand. At first sight, gold’s reaction may be surprising, considering the potential consequences of the conflict and also the typical skittishness of the more short-term-oriented traders in the market. But a closer look suggests that it is in line with the historical pattern of such geopolitical shocks not lastingly lifting gold prices. 

Deviations from this pattern have only occurred when the conflict had a significant economic impact, as for example during the second oil crisis in 1979/1980. As of today, we believe the risk of such oil supply disruptions is very low, as is the risk of a closure of the Strait of Hormuz, which is a key oil market choke point. Considering the contained reactions of Israel’s and Iran’s allies, a spreading of the conflict, which could push gold prices higher, also seems rather less likely.

Barring a significant economic impact or a spreading in the region, the gold market is likely to lose its interest in the conflict sooner or later, as suggested by similar events in the past. Nonetheless, we see the conflict as an element that is supporting the prevailing bullish mood in the gold market, while fundamentals remain favourable. Demand from safe-haven seekers should stay strong amid prevailing economic and political uncertainties. Buying from central banks should stay strong as well, considering their desire to be less dependent on the US dollar as a reserve currency. We reiterate our Constructive view on gold against this backdrop.

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