The escalating tensions between Iran and Israel have significantly impacted the global financial markets, with gold emerging as a highly sought-after safe-haven asset for investors. As the conflict intensifies, gold prices have reached new highs, driven by increased demand for the precious metal.
On the Multi Commodity Exchange (MCX) in India, gold prices have surged to approximately Rs 76,114 per 10 grams, reflecting the heightened geopolitical risks and lower US bond yields. This upward trajectory is expected to continue as global uncertainties persist, with market analysts predicting further increases in gold prices.
Geopolitical Tensions and Safe-Haven Demand
The ongoing conflict in the Middle East has heightened fears of a larger regional war, prompting investors to seek refuge in safe-haven assets like gold. Historically, gold has served as a crisis hedge due to its lack of credit risk and negative correlation to risk assets. This has been vividly demonstrated in recent geopolitical events, such as the conflict between Russia and Ukraine and the COVID-19 pandemic.
Hareesh V, Head of Commodities at Geojit Financial Services, noted that gold prices are hovering near lifetime highs due to worries over escalating Middle East tensions. He also highlighted the role of increased jewellery demand during the peak festival season and the impact of a weak Indian rupee on the domestic market.
Impact of US Federal Reserve Policies
The anticipation of interest rate cuts by the US Federal Reserve has also contributed to the upward pressure on gold prices. Lower interest rates reduce the opportunity cost of holding non-interest-yielding assets like gold, making it more attractive to investors. This, combined with concerns over inflation and the weaker dollar, has driven gold prices higher.
Market participants are closely watching the US economic data and the Federal Reserves policy decisions, particularly the upcoming US Non-farm payrolls data. The odds of a 50-basis point interest rate cut in November have decreased, which has kept the dollar strong and limited major gains in gold prices.
Global Demand and Central Bank Activities
Aside from the geopolitical tensions, gold demand has been bolstered by various other factors. Central banks, especially in emerging market countries, have been steadily increasing their gold reserves as part of de-dollarisation efforts. This trend, along with sluggish economic activity and stimulus measures from countries like China, has supported the gold rally.
Goldman Sachs has predicted that gold will extend its record-setting rally to new highs by early 2025, with a target price of $2,900 per troy ounce, representing a 9% upside from current levels.
The recent reduction in import duties on gold in India has also fuelled demand, attracting buyers eager to capitalise on the favourable pricing. In China, where confidence in traditional investments like real estate and stocks has waned, gold has witnessed a surge in popularity.
Technical Analysis and Market Outlook
Technically, gold prices are expected to move higher toward Rs 78,500 to Rs 80,000 in the short term, with support levels at Rs 74,800 and Rs 73,980. Internationally, gold prices have reversed their pullback and are trading above $2,660, with potential to extend gains to $2,700 if they clear the all-time high of $2,685.
The correlation between geopolitical conflicts and gold prices is well-documented. During times of war, governments often print more money to fund military expenditures, leading to currency devaluation and increased demand for precious metals like gold and silver as a hedge against economic instability.
In conclusion, the current geopolitical landscape, combined with economic factors and central bank activities, has created a robust environment for gold prices to rise. As uncertainties persist, investors are likely to continue seeking safe-haven assets, driving gold prices to new highs.
