Gold price rallies on Iraq, Ukraine

Gold price rallies on Iraq, Ukraine

Fighters of the Islamic State man a checkpoint. Source: Aljazeera

The gold price extended gains in pre regular hours trading on Friday as Iraq's descent into chaos prompted the return of safe haven buying.

On the Comex division of the New York Mercantile Exchange, gold futures for December delivery – the most active contract reached a high of $1,324.30 an ounce, up nearly $12 from Wednesday's trading session and the highest since July 10.

After the White House OK'ed airstrikes on fighters of the Islamic State which now control vast swathes of the north of the country, the US looks in danger of being pulled back into a conflict it has spent the last six years extricating itself from.

"We can act, carefully and responsibly to prevent a potential act of genocide," Obama said on Thursday, referring to the Yazidis, a religious minority group with a history pre-dating that of Christianity and Islam, who are trapped on a mountaintop after fleeing advancing militants.

At the same time fears of a military invasion of Ukraine by Russian forces are building. Russia has built up the number of combat-ready troops on the Ukrainian border to 20,000, according to Nato.

Russia could use the intensified fighting in the east of the country which has led to some 1,300 deaths since April to invade "under the pretext of a humanitarian or peacekeeping mission."

Gains in the price thanks to gold's status as a hard asset and storer of wealth in times of trouble has proven short-lived this year however, as previous rallies based on geopolitical concerns tended to fade quickly.

At the moment, the metal is also finding favour as an alternative investment amid a sharp correction in US equities. On Thursday the blue-chip Dow Jones index dropped to a 3-month low while the broader S&P 500 are trading at levels last seen in late May.

Declines on Wall Street were set to continue on Friday after a steep sell-off on European and Asian markets.

Surprisingly the oil price has not benefitted much from the turmoil in the Middle-East and Eastern Europe and continues to trade below $100 a barrel, down from more than $106 a barrel at the end of June.

Looking at the ratio between the gold price and the oil price which usually rise in tandem (rising oil prices pushes up inflation increasing demand for gold as a hedge), gold still looks undervalued by comparison.

Since 1970 the average ratio – how many barrels of oil can be bought with one ounce of gold – is 15 compared with just over 13 now, which suggests that despite the fall in crude and recent strength of gold, the metal remains cheap compared to oil.

Image source Aljazeera