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The Iran the war continues to shake global markets, but gold it doesn’t shine so brightly at the moment, although many have for a long time considered a safe haven during the crisis.
Gold prices fell about four percent on Tuesday to about $5,124 an ounce since the announcement, with some experts saying the decline was due to a stronger U.S. dollar.
“The dollar is in absolute decline, as are U.S. government bonds, and that’s a strong tailwind for gold and especially silver,” independent analyst Ross Norman said in an interview with Reuters.
Commodities such as gold and oil are priced in US dollars because it is considered the most used currency and is linked to the world’s most powerful economy.
This means that a stronger US dollar will usually lower the price of these products because fewer dollars are needed to buy them.
“One of the problems with gold right now is that it’s had such a run up recently and speculation has peaked,” says Colin White, managing director of Verecan Capital Management.
“It’s more fragile right now in this moment. So that’s what goes in the face, ‘There’s always a safe haven’ — nothing is always nothing.”
The Iranian conflict affects the global economy
On Saturday, the US and Israel launched strikes on Iran, sparking a new conflict in the already tense and volatile region of the Middle East.
Concerns about how long this conflict could last and whether things will escalate are potential reasons why investment experts say the US dollar is now becoming more attractive.
“When the world gets really, really, really, really scary, the USD (US dollar) seems to be in charge, doesn’t it? And for no other reason than the USD,” says White.
“The whole world trades on trust, right? So money flows where there’s trust. And when there’s no other place you can get any trust, the global vote is USD, and I think that’s the case again this time.”
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This means that the US dollar can currently be considered a stronger asset than gold and reflects investor confidence in the US amid the Iran conflict.
At the same time, exchanges like Wall Street was sold off in early trading on Tuesday.
Iran launched counterattacks on US military infrastructure, embassies in allied countries like Saudi Arabiaand nearby oil and gas facilities.
Iran has also effectively closed the Strait of Hormuza vital sea route through which a fifth of the world’s oil passes, threatening all ships that attempt to pass through the area.
This threatens the supply of oil in the world the longer the conflict lasts, and when there is less oil, the price rises.
This was said by US President Donald Trump on Monday the conflict could last four to five weeks or more.
A barrel of crude oil was hovering around $74 at press time, up nearly 20 percent from less than $64 last Thursday.
While a stronger US dollar may lead to lower oil prices, these supply concerns neutralize any potential downside.
Then there is the risk of inflation which bring higher oil prices.
The prices of goods and services rise over time, which is known as inflation.
But the rate of price growth could accelerate as a knock-on effect of the conflict in Iran, experts say.
Higher oil prices usually lead to more expensive gasoline, including cars, trucks, cargo ships, airplanes and other forms of transportation.
Businesses will usually pass these higher costs on to consumers, fueling inflation.
“It certainly affects what you’re going to pay at the grocery store, when you go to the mall, the retail outlets, a lot of the economy is fueled by diesel, and diesel prices are certainly going up a lot more,” said Patrick De Haan, oil analyst at GasBuddy.
“While inflation is well under way, the attacks on Iran are also putting the wheels of inflation back into motion as energy prices begin to jump in response.”
The risk of higher inflation is also why gold prices are falling.
If inflation rises sharply, especially in the US, there is a greater chance that central banks like it US Federal Reserve they will be forced to raise interest rates to prevent prices from becoming too high.
But that means the US dollar will also rise as higher borrowing costs attract more foreign investment and increase the value of the local currency.
That’s why gold prices are falling right now — expectations of higher U.S. interest rates coupled with the risk of inflation from rising oil prices as the conflict in Iran raises concerns that supplies could soon run out.
“People are trying to find direction and there’s a lot of uncertainty, and markets hate uncertainty,” White says.
“There are different parts of the market where things are really bullish going into this. Other places where people were pessimistic going into this. And so it’s all affecting that change in perception and expectations right now. And it’s happening in real time and it’s scary and people make different decisions when they’re scared.”
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