Gold benefits from safe-haven flows amid prospects of conflict between Israel and Iran

Western investors are relishing the prospect of “panic-free cuts”, but Shanghai traders are buying precious metals. This morning, the prospect of a direct military confrontation between Israel and Iran is driving safe-haven flows into gold, notes TDS commodities analyst Daniel Ghali.

The monetary inflation outlook has historically benefited gold

“Selling activity in gold was a little limited, but top traders still liquidated nearly 5 tonnes of notional gold over the past week. This contrasts with the sentiment of Western investors. Our macro fund positioning reading remains at the highest levels since the July 2016 Brexit referendum; Re-leveraging from risk parity and volatile target funds is supporting a rally from CTA, and prices continue to rise unchallenged.”

“For Western investors, monetary inflation concerns are rising as participants see the Fed’s reaction function as asymmetric at a time when the US economy remains decent by many measures. We expected a more measured normalization of monetary policy to challenge inflated positions, given that aggressive global easing, similar to current market expectations, has typically occurred in response to deteriorating economic or financial conditions.”

“This monetary inflation outlook has historically benefited gold prices, but make no mistake, in real terms, prices are already at challenging levels not seen since the 1980s, macro fund positioning is already extreme, central bank buying activity has slowed and the resurgence of confidence in Asia could destroy a major driver of gold demand. In the immediate term, the prospect of a direct confrontation between Iran and Israel drives even more capital to gold.”