As investors around the world try to understand the recent flare up between the U.S. and Iran, they are rushing to safe haven assets, such as precious metals.
As another round of tensions between the U.S. and the Middle East has resumed, gold has traced back to its six-year highs, last seen in September. The metal has been outperforming as of late, having recaptured the $1,500 level and appreciated since December.
As news broke out that a U.S. airstrike in Baghdad killed top Iranian general Qasem Soleimani, investors wasted little time flocking to safe-haven assets in fears of an escalation. The rush to safety has brought gold to the highest level seen since 2013.
Tensions between the two nations have been going on for some time and can largely be traced to renewed sanctions placed on Iran by the U.S. after the former’s refusal to participate in denuclearization. The latest flare-up saw Iran-backed militias attack the U.S. embassy in Baghdad, which forced non-military personnel to vacate the premises. After two days of rioting, the U.S. deployed 750 troops to assist the Iraqi military with combating the attackers.
Days after the deployment, the Department of Defense (DoD) issued a statement saying that the Presidential directive led to the killing of Soleimani, who had been the orchestrator of the embassy attack which caused deaths of numerous U.S. and Iraqi personnel. The DoD said that Soleimani was planning more attacks of the kind, adding that his previous schemes had already claimed the lives of thousands. Iran was quick to respond, with their foreign minister tweeting that the U.S. will bear the responsibility of its actions and the Fars News Agency reporting that Iran’s top officials have scheduled a meeting to discuss the country’s response.
Chris Rupkey, chief financial economist at MUFG, noted that the markets have been thrust into a state of panic, with participants not knowing what to expect or when the coast has cleared. The sell-off in the stock market reflected the risk-off sentiment, as the Dow Jones index plunged on Friday by more than 300 points.
Other haven assets have seen an increase in demand as well, with investors scrounging up the Japanese yen as well as government bonds. The latter supports the belief of various analysts that appetite for risk assets is slowly diminishing to the point of investors buying low or negative-yielding bonds, as the 10-year Treasury yield recently posted its biggest monthly decline on record.
With rising fears that a military conflict between the U.S. and Iran could significantly impact the global economy, the catalyst for gold’s widely-predicted climb to $1,600 this year could come sooner than expected.