Gold breaks $1,600 as US/Iran tensions rise before profit-taking

London — Gold continued to track higher Wednesday on escalating tensions between the US and Iran, with the metal breaking seven-year highs as it briefly went above $1,600/oz during morning trade in Europe.

The move higher came after Iran launched missile attacks on US bases in Iraq in retaliation for last week's US drone strike in Baghdad that killed General Qassem Soleimani. Bases in Ain al Asad and Erbil were attacked, a spokesman for the Islamic Revolutionary Guard Corps said, according to Tasnimnews agency.

Iran's Supreme Leader Ayatollah Ali Khamenei said Wednesday after the attacks that the US should leave the Middle East, a sentiment echoed by Iranian President Hassan Rouhani.

"An important incident has taken place," Khamenei said in a televised speech in Iran, after Iran's attack on the US military bases. "The issue of revenge is something else. The Americans brought war, sedition and ruins... the negotiation and sitting behind tables is a prelude for their interference which should end."

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Later in the European morning spot gold had given back some of its hefty gains, trading around $1,580/oz.

"Gold had a cracking 2019, so there was already some momentum behind it. The recent aggression between the US and Iran has simply added fuel to the fire. Bullion is the de facto safe haven in times of uncertainty," said one senior banking source.

Broker Jefferies noted that the gold price appreciated around 18% year on year in 2019. It however is doubtful of a sustained rally in 2020, believing the kneejerk reaction to be temporary.

"Gold prices jumped 18% in 2019, outpacing silver's 15%, for its best year since 2010. Spot prices have been fuelled by recent safe-haven buying, but a signing of a phase 1 trade deal [between the US/China] and improving industrial outlook is likely to take some of the wind out of sails for the yellow metal," the broker cautioned.

ActivTrades chief analyst Carlo Alberto De Casa was more bullish on the outlook for gold.

"From a technical point of view, the previous resistance at $1,587, which is the high achieved earlier this week, becomes a key support level and as long as the price remains above it, the outlook remains positive for gold," the analyst said in a note to clients.

RBC Capital Commodity Strategist Christopher Louney said in a note: "It is risk and uncertainty that we think will determine gold's ability to post gains in the coming years. And given the political and geopolitical events on the calendar, we are certainly positive on gold's price performance."

Citi said that it maintains its view that gold could hit $2,000/oz, and not just on the back of the heightened tensions in the Middle East.

"Fundamental factors including low yields, emerging market central bank buying and a weaker US dollar are the primary drivers of Citi's longstanding bullish gold market outlook that targets $2,000/oz in the medium-term (e.g. 2021/2022)," it said in a research note.

It cautioned, however, that while military strikes usually have far-reaching impacts on regional and sometimes global economies, "the gold price rally fuelled by increasing [safe-]haven demand has tended to be benign and short-lived historically. So while gold prices may surge north of $1,600/oz in short order, there may need to be follow-through impacts across equities, rates, and FX vol markets for an ongoing bid -- else it is very likely gold prices will normalize in a (still high) $1,500-1,600/oz range."