Gold futures rallied on Wednesday, with prices looking to settle at their highest levels since late August after an explosion at a Gaza City hospital prompted investors to shun risky assets and seek safety in the precious metal.
Wednesday’s rise in prices has helped gold outperform the S&P 500 index
on a 12-month return basis.
On Comex, the most-active December gold contract
rose $32.60, or 1.7%, to settle at $1,968.30 an ounce after touching a high of $1,975.80. Prices settled at their highest since Aug. 30, according to Dow Jones Market Data.
Over the last 12 months, most-active gold futures have seen a return of 18.87%. The price return for the S&P 500 is 16.69% and total return is 18.7%.
“The yellow metal is a solid hedge against risky assets that get smashed by a severe fall in appetite,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a market note.
Hundreds of people were killed when a blast hit a hospital in Gaza City. Hamas have blamed an Israel airstrike, while Israeli military blamed a rocket misfired by other Palestinian militants.
Gold isn’t facing the “typical, every-day outside influences,” Adam Koos, president at Libertas Wealth Management Group, told MarketWatch. “The Middle East conflict is 100% to blame for the recent rebound in gold.”
Against that backdrop, U.S. stocks declined in Wednesday dealings, with the Dow Jones Industrial Average
down 265 points, or 0.8%, at 33,733, and the S&P 500 down 52 points, or 1.2%, at 4,321. The Nasdaq Composite
fell 200 points, or 1.5%, to 13,334.
So far, gold has found support on the back of haven flows due to the situation in the Middle East, “but with the dollar maintaining its bullish trend and bond yields on the rise again, the opportunity cost of holding gold continues to rise,” said Fawad Razaqzada, market analyst at City Index and FOREX.com. A stronger dollar tends to pressure prices for dollar-denominated gold.
“Therefore, it is not going to take much to slam gold back down,” said Razaqzada. “Perhaps if there’s a ceasefire between Israel and Hamas, then that could be the trigger” for gold’s decline.
Judging by the way gold has rallied, “it looks like investors are pricing in a sharp escalation in crisis in the region,” he said. “If, hopefully, that doesn’t happen, then gold is at risk of reversing sharply lower.”
Gold has climbed sharply despite renewed headwinds from the U.S. interest rate outlook, said Michael Ingram, market analyst at Kinesis Money.
Tuesday saw a raft of U.S. economic data, with retail sales, manufacturing and industrial production, and capacity utilization for September, all coming in higher than expected, he said in market commentary. “With further evidence of U.S. economic resilience, interest rates have continued to track higher, creating headwinds for non-yielding assets, such as gold.”
The market awaits further clarity on the interest rate outlook from a speech by Federal Reserve Chairman Jerome Powell on Thursday but so far, gains for the U.S. dollar, and its dampening impact on gold prices, have been “marginal as this is already considered a very ‘crowded trade’” within the foreign exchange markets, said Ingram.
Recent gold investment flows appear somewhat mixed, he said. “Demand from central banks appears unabated, but private portfolio investment via [exchange-traded funds] and similar vehicles, shows net outflows in both Europe and the U.S., with only Asia bucking the trend. However, ETF flows have often proven volatile.”
Despite all of that, however, “gold continues to benefit from its status as a ‘safe haven asset’ amid intensifying geopolitical uncertainty,” Ingram said. “Renewed pressure on conventional alternatives in both fixed income and real estate markets has further cemented its strategic position within investment portfolios.”