LAWRIE WILLIAMS: Gold spikes on U.S. strike but gold stocks fall

The U.S.-ordered, and implemented, drone strike which killed Iran’s General Qasem Soleimani outside Baghdad Airport in Iraq had an immediately positive effect on the gold price but, counter-intuitively seem to have had a negative effect on the two leading gold stock indexes – the HUI and the XAU – both of which lost over 1% on Friday.  The killing of General Soleimani, considered to be the second most important leader in Iran after Ayatollah Ali Khamenei, seems to have been nothing short of a U.S. state sanctioned assassination and will undoubtedly hugely increase tensions, and anti-American feelings in what is a hugely volatile part of the world.

President Trump has claimed that General Soleimani was involved in the process of plotting ‘imminent and sinister attacks on American diplomats and military personnel’, although any evidence of such is said to be flimsy at best.  Iran has promised severe revenge and looking from afar it would seem that the U.S. move is likely to increase the dangers for U.S. citizens and allies working in the Middle East and elsewhere in the world far more than any direct threats or actions from anti-American militants located anywhere.  It is hoped that cool heads will prevail, but Iran will consider Soleimani’s death akin to the assassination of the U.S. Vice President or Secretary of State by Iranian agents and one would certainly expect that retaliation of some kind is inevitable.  However any direct response may be limited by fear of potential U.S. counter strikes given its technical weapons superiority.

The gold price had already been advancing before the U.S. strike and closed just above $1,500 the day before.  In the aftermath of the drone strike, assessment of the potential geopolitical fallout with likely military escalation caused the gold price to spike by around $50 on Friday.  If there is no Iranian response immediately apparent apart from rhetoric one suspects there will be a correction next week – a view supported by the performance of gold mining stocks on Friday which fell back despite the huge boost in the gold price.  In theory the performance of gold stock prices is often an indicator of the metal price’s direction and if this theory holds in this instance we can probably expect prices to fall back in the week ahead.

However, overall we are still positive on the price of gold for the year ahead, but the move at the end of last week was steeper and quicker than we might have anticipated.  It will be interesting to see whether demand picks up again in China and India this year, which could be key to gold price fundamentals, particularly if there is a slowdown in central bank and gold ETF purchases – not that we are expecting either to happen.

The U.S. and its economic progress will probably remain the principal gold price driver in 2020, and this is somewhat uncertain at the moment.  Government data tends to remain mixed and the price has been moving up and down accordingly.  Likewise perceived progress, or otherwise. In the U.S./China trade negotiations will likely be a factor too.  We do expect a Phase 1 accord to be signed in 10 day’s time which could be another negative for the gold price – that is until the realisation sets in that the principal differences between the world’s two leading economies remain as far apart as ever.

The U.S. Federal Reserve and its interest rate policies will also continue to be a price driver for gold, but unless it is seen as likely to diverge from its current cautious policy, and move interest rates up or down accordingly, the Fed may only have a relatively minor role to play as far as gold price influence is concerned in the year ahead. 

When Asian and European markets came on line this morning, precious metals prices all ad advanced further.  It will be interesting to see if these advances are maintained, or perhaps brought down when the U.S. markets open later today, but the Soleimani killing looks to be a major game-changer..  Asian equities also fell heavily and European lones opened sharply down too,

05 Jan 2020

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

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