By John McDonald
When Iran “stood down” from conflict with the United States last week, gold prices fell by nearly $60 an ounce from peaks above $1,600 just prior to President Trump’s announcement that Middle Eastern tensions seemed to be easing.
Calling Iran’s decision to avoid U.S. casualties in its “retaliation” for the death of the country’s top general “a good thing for all parties concerned,” the president’s announcement that the country “appears to be standing down” was certainly not good for gold at first glance.
When news first broke on the Iranian missile attack on a U.S. base in Iraq, gold prices skyrocketed.
This was not particularly surprising, since global tensions are nearly always positive for gold values.
To further exacerbate economic uncertainty, a potential conflict with Iran had not been on any public economic radar when 2020 predictions were being made.
As 2019 drew to a close, most analysts were focused on the twin issues of impeachment and U.S.-China trade tensions.
The former is considered by most to be a foregone conclusion, and the latter was already winding down as a potential threat to economic stability.
“With the impeachment proceedings, it was by and large mostly taken for granted that the president would be impeached and not be convicted, not be removed from office,” said Scope Ratings director Dennis Shen.
However, Shen continued, the Iran tensions have a much cloudier outlook even once the immediate threat has passed. “With Iran, there is a much higher asymmetric, or tail risk,” he said.
This means that the global economic environment is likely to remain volatile even in the wake of a “resolution” of the current conflict, and that volatility will probably keep gold values high.
Not surprisingly, indicators of rising market volatility rose earlier this week.
Gold rallied to a six-year high; crude spiked, and bitcoin values soared. As Iran announced its withdrawal from the nuclear deal, Iraq officially voted to expel U.S. troops, and the online war of words among state officials escalated, those indicators became more pronounced.
All of this combined to create a highly vulnerable environment for the financial markets that is likely to continue even as Middle East tensions ease.
“Markets at the moment are highly vulnerable because [they] had such a good run last year,” said Berenberg chief economist Holger Schmieding. He added, however, that he does not foresee a “major threat to the global economy” unless the “asymmetric” Iranian threat continues to grow in scale.
Whether the Iranian threat expands or diminishes, however, the gold fall-off in the wake of President Trump’s announcement regarding easing tensions in the Middle East is unlikely to continue for long.
In fact, as of midday on January 10, 2020, values were already trending back upward and the 30-day change in gold prices was still more than 5 percent to the good.