Gold surged to its highest since 2013 as rising tensions in the Middle East stoked demand for havens, with Goldman Sachs Group Inc. seeing more room to run. Palladium extended gains to a fresh record.
Bullion neared $1,600 an ounce after Tehran said it would no longer abide by any limits on its enrichment of uranium following the killing of General Qassem Soleimani. President Donald Trump said he’s prepared to strike Iran “in a disproportionate manner” if it retaliates against any U.S. target.
Gold may prove a better bet than oil amid rising tensions, according to Goldman analysts.
“History shows that under most outcomes gold will likely rally to well beyond current levels,” analysts including Jeffrey Currie and Damien Courvalin said in a note. That’s “consistent with our previous research, which shows that being long gold is a better hedge to such geopolitical risks.”
Spot gold climbed as much as 2.3% to $1,588.13 an ounce on Monday, the highest level since April 2013, and traded at $1,566.93 at 2:07 p.m. in New York. Prices could reach $1,600 if tensions escalate further, according to analysts including those at UBS Group AG. Futures settled 1.1% higher on the Comex.
While further escalation could trigger more upside in prices, the rally risks running out of steam as liquidity returns to the market after the New Year break, said ABN Amro Bank NV strategist Georgette Boele.
“Investors came back from holidays and experienced a $100 higher gold price compared to when they left,” she said. “Some have bought it in a kind of panic way, while others who already hold gold will probably wait and see.”
JPMorgan Chase & Co. analysts expect that an extension of the rally to $1,655 is “highly likely,” whereas a break below $1,531.22 could lead to a setback.
“Markets tend to overreact to geopolitics when trading is thin, as it has been during the post-holiday period, but investors are right to fret about what is happening in the Middle East,” the analysts, including Natasha Kaneva, said in a Monday note to clients.
Bullion is building on the largest annual climb since 2010, which was driven by the U.S.-China trade war’s drag on global growth, easier monetary policy across the world’s leading economies and sustained buying from exchange-traded funds and central banks.
“Negative real rates in the U.S. and a weaker U.S. dollar favor stronger precious metal prices in general,” said Giovanni Staunovo, a commodity analyst at UBS Wealth Management. “Thus, we see value in staying long the metal.”
The Federal Reserve is unlikely to raise interest rates within the next six months, which will in turn probably keep a cap on the dollar. The rally in gold and other precious metals has been “so outstanding” that it’s contributing to dollar weakness, Stephen Gallo, European head of FX strategy at BMO Capital Markets, said in a note.
“Gold is now trading as a haven asset and ignoring the former headwinds,” George Gero, a managing director at RBC Wealth Management, said by phone Monday. “With the Fed on hold, you’ve taken out one of the headwinds, and so gold seems to be the haven of choice to preserve purchasing power, and I think investors will continue to look at gold as a necessary haven.”
Palladium has also benefited from the optimism surrounding havens, as well as its own positive fundamentals. The metal is in a multiyear deficit as demand rises in autocatalysts amid stricter emissions standards.
Spot palladium hit a record $2,032.58 an ounce Monday, heading for a close above $2,000 for the first time.
“Palladium, like gold, has been steadily tracking higher over the last two weeks, and the conflict between the U.S. and Tehran seems to have bolstered this,” said Sean MacLean, research strategist at Pepperstone Ltd. “Demand for palladium is increasing faster than its supply, so the long-term trend is on the up anyway.”
(By Ranjeetha Pakiam and Justina Vasquez, with assistance from David Stringer, Cormac Mullen and Elena Mazneva)