Gold: US sanctions on Iran could spark a retaliation and risk-off

The price of gold has fallen back to where it had started between the $1,550s and $1,560s, printing a low of $1,552.83 following the deescalating speech from President Donald Trump addressing the Iranian missile attack targeting a US military base in Iraq.

In early Asia, there had been rumours which transpired into confirmed reports of retaliation from Iran which played havoc on financial and commodities markets, sending gold through the $1,600 handle for the first time since April 2013. $1,611.34 was reached before the price action moved into a chop as markets started to discount a likely military retaliation from the US considering that there had been no US casualties and Iran had made clear to the US that there would be no further fury so long as the US did not retaliate. 

The price of gold started to deteriorate throughout the Asian and European markets as profits were taken by investors who now eagerly awaited a highly anticipated speech from President Trump which came at 11.30 ET where he delivered a balanced response to the attack. More on that here, but in conclusion, the US will respond by imposing further economic sanctions which those already imposed under Trump's administration have already crippled Iran's economy. 

The US doesn't want a war with Iran and markets can breathe a sigh of relief and get back to business as usual, for now. Consequently, its risk-on out there and for the foreseeable future. US benchmarks have rallied to all-time highs again and the US 10-year Treasury yield has rallied from a low of 1.81% to a high of 1.8650% since the speech, pressuring gold lower by 1.38%.

Gold could still be a buy

However, analysts at TD Securities expect that the bull market in gold is still in its early days:

"It is worth recalling that a bull market may well translate into a new regime of higher aggregate open interest in the longer-term, which is to say that while the yellow metal may retrace in the near-term, we still expect strong upside momentum looking forward."

We are not in the clear yet - US sanctions on Iran still to be announced

The most immediate threat is a provocative reply from Iran to Trump's proposed sanctions. The IMF is already forecasting zero growth in 2020 following 2019s tightened US restrictions on the Iranian banking sector which was intended to bring Iran's oil exports to zero, denying the regime its principal source of revenue. There is little left for the US to squeeze although it would not be surprising that Iran will become part of the trade negotiations with China. 

China had been given leeway and exemptions to import Iranian oil – that may well be subject to change now. Trump alluded to such in his speech when he said that he plans to ask NATO allies to "become much more involved in the Middle East process," but at the same time, calling out China (among other allies such as the United Kingdom, Germany, France, Russia) to break off from the 2015 Iranian nuclear deal. Such provocation and additional sanctions (TBD and announced) could cause an uproar in the Iranian 80 million population, resulting in further economic discontent and subsequent riots similar to last year's and the biggest anti-government protests that Iran had seen for almost a decade in that December of 2017 when growth fell dramatically due to the prior sanctions. However, Trump's note of caution to Iran within his speech could be the deterrent that closes this case, once and for all – it is up to Iran to toe the line with respect to nuclear.

The road ahead is full of potholes

For the 2020 road-map, it is fraught with hazards on a geopolitical scale. Notwithstanding a volatile situation in the Middle East, markets, for now, are relieved that both sides are billing the Trump reaction a victory. However, global trade negotiations are on the cards with Brexit as well as US/global economic powers such as China and Europe. Gold will tend to attract safe-haven flows and idle investment capital as risks come to the fore, just as we have witnessed with the latest crisis in the Persian Gulf – stay tuned.

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