The escalating tensions in the Middle East, notably between Israel and Iran, have led to a notable ripple effect in the financial markets, particularly within the commodities sector. The prevailing sentiment hints at a low probability of a major conflict, nevertheless, if such an event were to happen, we should keep in mind that a broader regional turmoil looms larger, and gold and oil would likely emerge as crucial assets to consider for our investment portfolios.
The Middle East has long been a region where geopolitical dynamics can shift rapidly, and recent events such as the assassination of Hamas leader Ismail Haniyeh in Tehran, as well as Iran vowing to retaliate and the violent exchanges between Israel and Iran-backed Hezbollah, have made this volatility even stronger. As investors, we need to understand that conflicts in this region can have a big impact on global markets and the value of our investments. Thus, it is important to pay close attention to these risks and make smart decisions to protect our money and investments.
During times of geopolitical uncertainties and instability, gold, in particular, is often seen as a safe haven, and this is essentially because gold’s value is not directly tied to the performance of any single economy or government, which makes it a reliable store of value when traditional financial markets are unstable. In essence, when the world feels uncertain, and the risk of conflict looms, one way to preserve wealth is by investing in gold, and the current situation in the Middle East is no exception as we have already seen gold prices rise in response to the escalating conflict, with each new development – from the Beirut strike to the heightened military alerts – further driving demand for this precious metal. As of yesterday, gold prices rose by more than 1%, reaching $2,458.25 per ounce for spot gold and $2,497.40 for U.S. gold futures, marking their highest levels since early August.
Furthermore, the fact that there is a more convincing speculation of the Federal Reserve implementing rate cuts following the latest producer price index (PPI) report, gold prices have surged even higher today. Let’s remember that if the Fed indeed lowers interest rates, it could lead to weaker values for the U.S. dollar and bonds, which in turn, will likely make gold even more appealing. Keep in mind that gold prices tend to increase in anticipation of interest rate cuts because lower interest rates make it less attractive to hold onto traditional interest-bearing assets like bonds and savings accounts. And although riskier assets also tend to increase in a low-rate environment, many also opt to diversify their portfolios with gold assets to safeguard their investments in case economic instability occurs.
Moreover, returning to the Middle East situation, it is worth noting that although the slowdown in global oil demand has taken center stage, if the tensions between Iran and Israel escalated to an actual conflict between the two countries, oil prices could rise too. In fact, U.S. oil prices surged past $80 per barrel yesterday, after it was announced that the U.S. had sent additional military forces to the region – news that heightened fears of a possible conflict further. The reason behind why oil could increase if tensions in the Middle East escalate to a serious conflict is because the region plays a crucial role in the global oil production, therefore, any threat to its stability can cause significant fluctuations in oil prices as there could be supply disruptions. However, the situation does not seem as concerning as of yet, and the focus is now on the underlying factors influencing global oil demand, such as the recent announcements from the International Energy Agency (IEA) and the Organization of the Petroleum Countries (OPEC), in which they highlighted a decrease in demand for oil, particularly in China. In addition, the OPEC has stated that although they have implemented production cuts, there is a possibility of an oversupply of crude oil in 2025, as other countries like Brazil, Canada, Guyana and the U.S. are producing more oil. Nonetheless, despite this, it is wise to remember that if a serious conflict were to break out, investing in oil could prove to be a smart move.
Ultimately, while the current situation may seem uncertain, the lessons from history are clear: geopolitical instability in the Middle East often leads to increased volatility in global markets. Thus, if we carefully consider the role of gold and oil in our portfolios, we can protect our investments and potentially benefit from the shifts in market dynamics that such instability could bring.
