Gold gleam dims amid Israel-Hamas war; is it no longer the ultimate safe haven?

Following the onset of the Israel-Hamas war, gold prices have seen an uptick, with investors flocking to the yellow metal on safe-haven demand. Gold prices on the MCX have gained just over 5 percent since the war began. But how much of this gain has been led by safe-haven buying? On October 9, the first trading day in India after the outbreak of hostilities, gold prices rose by 1.6 percent on the MCX, a jump not seen in the last 20 weeks. This was also in contrast to the past six months, wherein gold prices fell 5.85 percent.

According to traditional wisdom, any escalation of a geo-political conflict is usually a good opportunity to go long on gold, since it is seen as a hedge against uncertainty.

Also Read | What could be the fallout of Israel-Palestine conflict on the Indian economy?

However, analysts believe that the war is not the sole reason behind the change in sentiment towards gold. There are other factors supporting the yellow metal’s price, namely, rising Treasury yields, a stronger dollar and inflation woes across the globe

Does gold still command the same kind of safe haven demand?

With analysts only partially attributing the rise in gold to the war, some question the stature gold holds as a safe-haven asset. “The holding at the SPDR GOLD ETF is around 861 tonnes as of October 10, which is the lowest since August 2019. This clearly signals that the safe haven demand has gone down,” said Jigar Trivedi, senior research analyst – currencies & commodities, Reliance Securities.

During the Ukraine-Russia war, Patel said the risk premium in gold piled up during the onset of the war, but quickly eroded. In two weeks, the price tumbled to pre-invasion levels, paring its gains.

On February 24, 2022, Russia invaded Ukraine. Following the invasion, gold prices surged from $1,936 to $2,039.5 within two weeks. However, starting March 16th, they fell sharply to $1,913, and then plummeted to $1,660 by September 2022. “Gold is not commanding the kind of safe-haven demand it used to,” said Bhavik Patel, senior commodity research analyst at TradeBulls Securities.

Instead of gold, investors have begun to look towards the US dollar and Treasury yields. For years, investors had considered gold to be a hedge against uncertainty. “This time, the dollar index reigns supreme, as it rallied more than 10 percent last year (2022) when the Fed started monetary tightening by hiking the interest rate. Currently, 10-year treasury yields have gone through the roof, making a new 16-year high,” said Deveya Gaglani, research analyst – commodities, Axis Securities. He added that due to the high rate, investors prefer short-term government securities over gold, especially since the latter is a non-yielding asset.

Gold gaining as investors divert USD flows

Money is flowing to the US dollar and gold as investors flee risky assets. However, since the greenback already saw a run of 11 consecutive weekly gains, which ended last week, the safe haven preferred now is gold, which had been subdued for a while.

The stronger-than-expected US jobs report on October 6 failed to deliver any more dollar strength, and the greenback has extended its fall since the report.

“Right now, following the war, we believe the risk premium in gold has already been built up. The possibility that the dollar may have formed a top is undoubtedly something that many investors are wondering about. This will further fuel conjecture that the worst is over for gold. The next up-move will be on the weakening of the US dollar and yields, unless the conflict between Israel and Hamas escalates,” said Bhavik Patel.

In September 2023, gold prices were down 4 percent as the Fed sounded hawkish and stated that rates would remain elevated for a longer time than previously estimated. However, there has been a change in stance from Fed officials, who sound more dovish, said Gaglani. This was supportive for gold prices as the Dollar index pared its gains, from a multi-month high above $107 to below the $106 level.

Reliance Securities’ Trivedi added that the rally in gold is equally a technical pullback as it is a result of safe-haven buying.

Gold versus silver, crude

In comparison to gold, silver has remained a laggard, and has been range-bound over the past year. Weak real-estate and economic data from China, the overall strength of the greenback and rising yields have soured sentiments towards silver. It remains a commodity for speculation only, said Trivedi.

On the other hand, Gaglani believes that since silver is 10 percent off its recent peak, it is an attractive bet for investors from current levels. He sees over 10 percent gains within the next 6-8 months.

Both crude and gold have seen an immediate first-order effect from the war, but between the two, analysts suggest that gold might see a further upside, since the crude rally has run its course. Unless there is action from the US or Israel on Iran, oil prices are expected to remain firm. If oil prices breach the three-figure mark, OPEC and its allies will step in to manage prices. “On the other hand, gold may find some floor near $1,800 and rebound to $1,900-$1,950 in three to six months”, said Trivedi.

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