Gold Prices Surge Amid Heightened Middle East Geopolitical Tension

  • Sep 16, 2019 BST
  • Team Kalkine
Gold Prices Surge Amid Heightened Middle East Geopolitical Tension

Safe heaven metals prices on the September 16th, 2019 market session rose after a strike against Saudi Arabian oil facilities, which has raised geopolitical tensions in the middle east and pushed the demand for safe-haven assets.

Gold Futures for delivery at the Comex exchange added 13.55 points or 0.90 per cent to US$1,513.05 an ounce against the previous closing price level of US$ 1,499.50 an ounce, at the time of writing (at 08:49 AM GMT).

The precious metals were on a declining trend before the drone strike was launched against Saudi Arabia's oil facilities, as US-China trade tensions were easing. This began to soften the demand for the safe-haven yellow metal.

Gold has added approximately 25 per cent in the year-ago period and registered a 52-week high of US$ 1,566.15 an ounce in September 2019 and a 52-week low of US$ 1,205.0 an ounce in October 2018. The root cause behind this steep surge in the yellow metal prices was inflated trade rifts between US and China, which pushed investors to take cover behind the safe-haven yellow metal amid heightening chances of an economic slowdown. This led to an increase in gold demand as investors wanted to hedge their portfolios against the weakening global economy and plunging stock prices.

The drone strike against Saudi Arabian oil facilities has also raised concerns of retaliation from the United States against Iran.

Brent crude oil prices surged as much as 18.9 per cent on the September 16th, 2019 market session to US$71.62/bbl in the early trading session- the highest one-day surge in the crude oil price in almost three decades. The spike in the crude oil prices, which followed news that Saudi Arabia's oil production would be substantially below maximum capacity for weeks, put Brent Crude oil on course for its one of the highest one-day surges, as market participants are not sure of the level of distortion in supplies.

Brent crude oil, the international benchmark, added around 11.4 points or 18.9 per cent to US$71.61/bbl before easing to USD$65.42/bbl during the early trading session in London. However, it is still trading higher by 5.31 points or 8.87% at US$ 65.42/bbl (at 09:16 AM GMT). The West Texas Intermediate (WTI) crude oil- the US crude oil benchmark, touched an intraday high of US$ 63.47/bbl or recorded a day’s highest surge of approximately 16 per cent, before easing to US$ 58.95/bbl, but still quoting 4.17 points or 7.57% higher against its previous close.

The President of the United States denounced Iran for being behind the strike at Saudi Arabia's oil facilities and on September 15th, 2019, said that the United States was "locked and loaded" for a potential retaliation to the attack. US Secretary of State Mike Pompeo tweeted that Iran has orchestrated a freakish attack on the world's energy supply.

The unprecedented one-day spike in the crude oil prices is the highest since Saddam Hussain invaded Kuwait in 1990. Analysts are estimating a loss of more than 5m bbl/day, which is the biggest shortfall arising from one incident. It equals to approximately 5 per cent of the global crude oil supply.

This incident has jolted the investors’ sentiments globally, and in China, the biggest importer of oil, the broader stock index, Shanghai Composite, ended 0.48 points or 0.02% lower at 3,030.75. The Hang Sang ended 228.14 points or 0.83% lower at 27,124.55, Germany’s DAX was trading 93.05 points or 0.75% lower at 12,375.0, and the UK’s FTSE 100 index fell off 9.83 points or 0.14% to 7,357.13 respectively.

However, the impact of the surge in crude oil price on the sovereign bond was limited because of trading holiday in Japan, but the investors' anxiety could be gauged through the rise in Gold prices, which surged by 0.90 per cent to US$ 1,513.05 an ounce.

Meanwhile, Houthi rebels from Yemen, who are backed by Iran, have claimed responsibility of the drone strike. The strike was carried out on facilities owned by Saudi Aramco, Saudi Arabia's state oil giant. This strike has compromised half of the Kingdom's oil production capacity, which stood for approximately 5 per cent of the global output. It has also escalated tension between Iran and the US, with the latter denouncing Iranians behind the strike.

The Abqaiq-the world's biggest oil-processing facility, located in eastern Saudi Arabia, was earlier also targeted in 2006 by Al-Qaeda's suicide bombers, but the attack failed. On September 14th, 2019, another militant group based out in Yemen and backed by Iran, has apparently succeeded in attacking the Kingdom’s largest oil-processing facility.

This has also aggravated the tense relationship between Iran and the United States. However, President Donald Trump of the United States also said that there is plenty of oil, and if needed, he is authorised to release the emergency oil stocks in an effort to cool down prices.

Meanwhile, several crucial policy decisions are due to be announced from central banks this week, including the US Federal Reserve decision which will be announced on September 18th, (Wednesday) and September 19th will see policy meetings in Japan, the UK, Norway and Switzerland, which are expected to influence the yellow metal prices in near-term.

The Federal Reserve is widely expected to consider another rate cut this time amid slowing global growth and increasing chances of a recession like situation, which in turn could push Gold prices higher.

Iron Ore Prices surged 40.52% on a YoY basis

Iron ore is the world’s second most important trading commodity after crude oil. Benchmark Iron Ore CFR China 62% Fe prices have surged more than 40% in the year-ago period. At the time of writing (at 12:03 PM GMT), it was quoting at US$ 96.54/dmtu and trading flat against the previous closing price. In the year-ago period, it has registered a 52-week high of US$ 124.31/dmtu and a 52-week low of US$ 64.1/dmtu. Australia and Brazil are the major iron ore producers globally and stands for 80 per cent of the total supply in the seaborne iron ore trade. The major Australian iron ore producers, primarily Rio Tinto and BHP Billiton, have access to the low-cost iron ore reserves and could continue to operate profitability at a lower price as well against the global producers.

However, a spike in the crude oil prices could impact Iron Ore producers as it will lead to increase in Iron ore mining costs and shipment costs as well, which are going to dent their bottom lines.    

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