Summary of this article
Gold prices initially gained due to rising safe haven demand amid widening Iran conflict
The Iran conflict also increased dollar's appeal as safe haven, overshadowing gold's safe haven appeal
Higher crude oil prices also raised US Fed's interest rate hike expectations
Higher US Fed rate expectations makes yield-bearing assets more attractive than non-yielding gold
Gold prices gained in early session on March 3 amid rising geopolitical tensions in the West Asian region. However, later during the session, the bullion pared initial gains to quote in red as US dollar strengthened.
On the COMEX, the April gold futures surged as much as 1.55 per cent to hit an intraday high at $5,394.20 per ounce. However, later, the futures contract pared all the gains to trade in red, down by nearly 1 per cent to trade at $5,257 per ounce.
Gold is not trading in the domestic derivatives market today as Multi Commodity Exchange (MCX) is closed on account of Holi.
Dollar Gains As Iran Conflict Widens
The dollar has strenghtened in recent days as investors turned towards the US currency for safety amid the Iran conflict.
The US dollar index, which measures the greenback against the world's six major currencies, gained for the third consecutive session today. The index surged as much as 0.86 per cent to 99.18 level, hovering near its five-week high. Over the three sessions, it has gained 1.66 per cent.
A stronger dollar usually weighs on gold because the metal is priced in US currency. When the US currency rises, gold becomes costlier for overseas buyers.
Oil Price Spike Supports Dollar’s Safe Haven Appeal
America’s limited dependence on other countries for its oil needs has further increased the dollar’s appeal, as it protects the US economy better than many of its peers from supply disruptions. At the same time, higher crude oil prices can fuel inflation, which may prompt the US Federal Reserve (US Fed)to raise interest rates or keep them elevated for longer to contain inflationary pressures, is also working in favour of dollar.
Higher US Fed rate expectations tend to make yield-bearing assets more attractive than non-yielding gold.
Oil price benchmarks, the Brent crude and the West Texas Intermediate (WTI) crude futures surged over 8 per cent today to reach $84.30 per barrel and $77.12 per barrel, respectively.
Escalating Iran Conflict
Meanwhile, reports suggest that Iran has shut the Strait of Hormuz, a key route for one-fifth of the global oil supply, raising fears of oil supply choke. A senior official of Iran’s Islamic Revolutionary Guard Corps (IRGC) said the Strait of Hormuz has been shut and warned that Iran would target any vessel attempting to pass through the key shipping route, according to local media reports.
Meanwhile, US President Donald Trump warned that a “big wave” of further attacks could follow, though he did not share specific details. The recent developments indicate that the conflict could widen further, thereby keeping uncertainty among market participants high.
What Should Investors Do: Is Now The Time To Buy Gold
Investors should adopt a measured approach and avoid chasing prices in gold. While the yellow metal could extend its gains in the near term if the conflict intensifies, the durability of the rally will depend on how events unfold.
“If the conflict continues, the risk premium for investors would increase, pushing gold prices in India to new records. Gold has traditionally been a safe haven asset for investors, and the sustained demand for gold could boost prices to new highs. Inflationary pressures due to rising crude oil prices following the disruption in the Middle East could also elevate the prices. However, the extent of the rally would depend on the outcome of the conflict, the monetary policy stance, and currency value. While the prices could surge in the short term, investors should keep a check at the overall scenario,” said Aksha Kamboj, vice president of India Bullion & Jewellers Association.
