Deepening Israel-Hamas Conflict: A notable threat to risk assets, potentially bolstering safe-haven precious metals

Prices of precious metals expected to remain well-supported in the short term

By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak Securities

Markets had a turbulent week that ended October 13, influenced by the Israel-Hamas conflict and dovish comments from Fed officials. The escalation of the conflict between Israel and Hamas had a significant impact on market dynamics, causing fluctuations in various asset classes.

Earlier in the week, markets reacted positively to a series of dovish remarks from Federal Reserve officials. The release of the Federal Open Market Committee (FOMC) meeting minutes also contributed to a more tempered market outlook, signalling that the tightening of financial conditions in the United States may have reached its peak. However, unexpectedly high US CPI data increased concerns about prolonged high-interest rates, spurring volatility. The US dollar, despite pulling back from a ten-month high, rebounded on signs of Israel preparing for a ground invasion of Gaza.

COMEX Gold prices made significant gains, marking a weekly increase of more than 3 percent. This surge, the most substantial since March, was driven by safe-haven buying amid the worsening conflict between Israel and Hamas. Silver also benefited from these safe-haven flows, with its prices rising by around 4 percent. However, the gains in silver were somewhat limited due to the softer performance of base metals.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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WTI Crude oil closed the week with over 5.5 percent gains, driven by Israel's call to evacuate 1.1 million residents in North Gaza within 24 hours. This disrupted expectations of containing the conflict, raising concerns of Middle East destabilization and global supply tightness. OPEC estimated a record oil supply deficit this quarter, with global inventories set to decline by roughly 3 million barrels a day.

In contrast, LME base metals extended their recent declines, influenced by a combination of factors. While there was initial optimism that China might introduce additional stimulus measures in response to the worsening real estate crisis, this was counterbalanced by indications of China's fragile economic momentum. Recent figures from China's Consumer Price Index (CPI) and Producer Price Index (PPI) pointed towards the risk of deflation. Additionally, investors were assessing the latest measures taken by China to close regulatory gaps in its struggling stock market in an effort to boost investor confidence.

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Looking ahead to the upcoming week, financial markets will closely watch a series of speeches by Federal Reserve officials, with particular attention on the remarks of Fed Chair Jerome Powell. In addition, the release of US Retail Sales and Industrial Production data will provide insights into the domestic economic landscape. Chinese economic indicators, such as GDP, fixed asset investment, and Retail Sales data, will be crucial in gauging the health of the world's second-largest economy.

Considering the ongoing geopolitical tensions in the Middle East and the diminishing prospects of another Federal Reserve rate hike, the prices of precious metals are expected to remain well-supported in the short term, driven by safe-haven buying. On the price action front, COMEX Gold is poised near a potential falling channel breakout point at $1,968 per troy ounce. If this level is surpassed on a weekly closing basis, the price may rapidly ascend towards $2,000 per troy ounce.

A similar dynamic could be observed in the case of Crude oil, which might experience a swift surge if the Middle East conflict escalates. Nevertheless, market participants should exercise caution, as the current premiums associated with precious metals and crude oil are vulnerable to erosion in the event of a resolution or de-escalation of geopolitical tensions.

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