Investment Insights

Gold Shines as Risks Escalate

  • Apr 17, 2024
  • Andrew Gillham

Gold has a been one of the standout performers so far this year, setting new record highs on a regular basis, and last week a hot inflation report out of the US, followed by Iran’s attack on Israel over the weekend, gave the rally even more impetus.

The precious metal, historically both an inflation hedge and safe-haven asset, briefly traded above $2,400 an ounce on Friday after warnings of an attack by Iran on Israel hit the newswires. Whilst Iran’s barrage of more 300 drones and missiles against Israel on Saturday night was a bigger escalation that many anticipated, the gold price settled down to close at $2,383 on Monday after the absence of any fatalities gave Israel time to weight its response rather than take any rash retaliatory actions which would destabilise the Middle East further.

Earlier in the week, it was the US inflation report for March which extended gold’s bull run. Headline consumer price inflation accelerated to 3.5% from a year earlier on the back of higher fuel, housing and healthcare costs. Despite the considerable distance to the Federal Reserve’s 2% inflation target rate, policymakers have signalled that they expect to cut interest rates three times this year, suggesting that they are prioritising economic growth at the expense of price stability.

On Thursday, the European Central Bank held its deposit rate at an all-time high of 4% but gave an even stronger hint that it is ready to start to cutting rates at its next meeting in June. Whilst acknowledging that external pressures are likely to cause inflation to fluctuate over the coming months, President Christine Lagarde voiced concern the overall risks to the Eurozone economy “remain tilted to the downside”.

After shrinking 0.3% in the fourth quarter, and over the whole of 2023, the region’s largest economy, Germany, is expected to contract again in Q1 2024 pushing it into a technical recession. Structural issues, including a shortage of skilled workers, and a steep downturn in construction activity have been exacerbated by a budget crisis which left a €60 billion hole in the government’s spending plans.

Equity markets struggled as investors weighed the possibility of a broader conflict in the Middle East and the blue-chip S&P 500 and technology focussed Nasdaq indices declined 2.7% and 2.3% respectively.

Stocks were also impacted by a lacklustre start to the first quarter corporate earnings season with some of Wall Street’s largest banks reporting on Friday. Shares in JPMorgan suffered their biggest one-day fall (-5.8%) in nearly four years after it warned that a troublesome geopolitical and economic backdrop will likely impact earnings in the year ahead.

Net interest income, the difference between what a bank pays on deposits and what it earns from loans and other assets, will also face headwinds if central banks start cutting interest rates later this year.

There was, however, some better news for shareholders of Goldman Sachs on Monday after it announced a 28% increase in profits in the first quarter. The investment bank was boosted by the performance of its equity and fixed income trading businesses and more buoyant capital markets activity. Goldman advised on the initial public offerings of Reddit and Astera Labs last month.

Oil is another asset highly correlated to events in the Middle East due to production and key shipping routes through the region and Brent Crude, the international benchmark, spiked to a six-month high of $92 a barrel on Friday before falling back on Monday.

Former US President Donald Trump reinstated sanctions on Iran’s oil in 2018 but the country has been able to continue to export up to 1.8 million barrels a day, selling to other countries including China and Uzbekistan.

(Cover Image Source: Kent Pilcher)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.