Looming Israel-Iran conflict sees gold price and USD march in tandem – ‘Very powerful move to the upside’

(Kitco News) – The threat of imminent strikes against Israel by Iran and its proxies in the Persian Gulf is rocking gold markets, with moves that are dramatic even by 2024 standards. 

Spot gold opened below $2,375 per ounce, but shot up from $2,393 at the U.S. market open to a new high of $2,431.59 by 11 am EDT, before giving nearly all of it back to trade up 0.32% at the time of writing.

Frank McGhee, head precious metals dealer at Alliance Financial, said he’s been among the doubters during gold’s recent rally, but he’s a believer now because the market is reacting to serious geopolitical events.

“I’ve been wrong on this for most of this move up,” McGhee said. “The best component that I can see now is that the market is finally paying attention to geopolitical, and as the threat of an Iranian attack on Israel looms, the market has finally just decided to take notice.”

He said that for years, including through much of the Russia-Ukraine conflict, traders and investors ignored geopolitics. “I think the difference here is that you’ve got very strong hands underlying [gold] from central bank buying,” McGhee said. “And this is just a runaway.”

“We’re in a really weird economic circumstance where you can, as illogical as it sounds, see gold and the dollar move in the same direction,” he said. “Back in the 70s when we had the price spikes, the dollar just got creamed, and that’s what supported the gold rally. Now we’ve gone back to being a net exporter of oil, and so for every dollar up in the crude, now it’s impacting the strength of the dollar.”

“Everything that you used to know about how the markets work is thrown into the garbage.”

He said that the dollar and gold are both acting as safe havens at the same time as fear spreads across the globe. “You see it very rarely,” McGhee said. “And when you see it, it’s always a very powerful move to the upside.”

McGhee said technical levels also go out the window in these situations. “This is just surfing the wave,” he said. “Put your trailers in, and as the market continues to rally, let your trailers expand. In other words, don’t be too tight because you will get some really volatile shakeout moves that you just want to try and ignore.”

“The question will be, how much of a corrective reaction we get if there is no Iranian-Israeli dust-up over the weekend, or how much saber-rattling can continue to be there,” he added.

“Sunday night’s going to be interesting.”

John Weyer, Director of the Commercial Hedge Division at Walsh Trading, also believes the threat of escalation between Iran and Israel is pushing traders into the gold market and the dollar ahead of the weekend.

“I won’t say this is 90 percent of the factor, but this is clearly led by the sanctions being thrown on, and geopolitical actions,” Weyer said. “We’re seeing a flight to quality in the metals. When you see gold up over $50, that’s more than technicals and fundamentals at play.”

Weyer agreed that many traders are getting into long positions, while others are adjusting their existing plays.

“You get short covering,” he said. “You might be reversing positions, short covering and then going long as well. We’ve had headlines over the past year, couple years coming from Ukraine, and then a flare up in the Mideast. But this one, with the sanctions and a Russian tanker stuck out in the Gulf, it’s got some teeth to it.”

He said that traders scrambling to cover their assets need to take upside and downside volatility into account. “If I’m carrying anything, I’m going to put on some protection either way on this,” he said, “because if something changes quickly, it’ll give it back just as fast.”

Weyer also remarked on the fact that gold was rallying even as the dollar strengthened against other currencies. 

“When you see that happen, it is a flat-out flight-to-quality, safe haven play,” he said. “In times of uncertainty everyone returns to gold, and the dollar’s proved to be stable for decades if not longer. You can say whatever you want about the U. S. government, but it has yet to fail, and you can see in the other currencies getting pounded, with the dollar up, some of that is probably leaving those currencies and going to the dollar.”

Weyer said that if nothing dramatic happens over the weekend, he could see gold retrace, but not by much.

“I think you could see us give some of it back, but we’re probably going to still remain at higher prices,” he said. “I think if it doesn’t flare up, it might take away the juice, so to speak, to keep rallying at this pace.”

“But you might see us trade at these levels [above $2,400] for a while.”