Gold eyes geopolitical developments for direction


Geopolitical jitters returned with a vengeance in recent days, with rising tensions between the US and Russia over Syria triggering a flight to safety and increasing demand for assets like gold.

While a further escalation in the situation could push gold prices higher in the near-term, it’s crucial to note that in recent years, such events have tended to have only a short-lived effect on the yellow metal.

Gold prices rallied sharply yesterday following news that a US military action in Syria is imminent, before they retreated today. The key market concern around this development is that Russia – a long time ally of the Syrian regime – has vowed to shoot down any missiles fired at Syria. This suggests that any US strike may be met with Russian countermeasures, generating the risk of a standoff between two of the world’s superpowers.

The latest reports suggest the US is weighing its options over a military action, while at the same time trying to rally support from European allies. In fact, President Trump tweeted today that an attack “could be very soon or not so soon at all”. Thus, in the near-term gold’s direction will probably hinge initially on how the US decides to strike, if at all, and subsequently in what manner and magnitude Russia retaliates.

An escalation in tensions – for example with the US unilaterally firing missiles and Russia shooting them down – could push gold prices back up as investors flee to safety. In such a scenario, gold could edge higher and break above the $1348/ounce level, marked by the April 4 highs, aiming for another test of the March 26 peak, at $1356.

Further above, the focus could shift to the pair’s recent highs at $1365. A decisive break above that area would mark a higher high on the daily chart, increasing the likelihood for more advances, initially towards the metal’s 2016 high at $1375.

On the other hand, if the US avoids military action altogether or if Russia chooses not to retaliate, gold could come under selling interest. The same may be true for prices if the US does carry out a military strike, but does so multilaterally with European nations or other allies, as Russia is less likely to respond to a collective action by several countries.

In such a scenario, prices could head lower towards the crossroads of the uptrend line drawn from the lows of December 12 and the $1320 barrier, the April 6 trough. Steeper declines could aim for the March 20 low of $1307, and further down, attention may shift to the round figure of $1300.

Besides geopolitical and trade concerns, the other major factor that could drive gold is the US dollar. Since gold is denominated in dollars, a decline in the greenback makes the metal more attractive for investors using foreign currencies, typically boosting gold prices. Conversely, a surge in the dollar would probably weigh on prices.

In the bigger picture, while a potential escalation in tensions could bring gold under renewed buying pressure in the short-run, it’s crucial to note that in recent years, geopolitical uncertainties have tended to have only a short-lived effect on gold prices. For instance, while the precious metal surged following the April 2017 US strike in Syria, it gave back nearly all its gains on the same day.

Another example are headlines around North Korea last year. While gold moved higher on the news, the gains were rarely sustained for long, even in an environment where the US dollar was falling.

Therefore, even if gold does move higher on Syrian developments, it’s an open question whether it can sustain such gains. That does not go to say that gold can’t stay higher – it can – but in order for that to happen, it may require a fresh catalyst or a much greater intensification in tensions than what we have seen so far.