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Edison points to interest rates as key gold driver amid geopolitical tensions


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Edison points to interest rates as key gold driver amid geopolitical tensions

Iranian Gen. Qassem Soleimani's Jan. 2 death in a U.S. airstrike triggered a flurry of analyst commentary on the future of gold, which spiked to a seven-year high during the week ending Jan. 10, though Edison Group analysts believe that gold will not truly "top out" until real interest rates in U.S. dollar terms reach 4%.

Gold hit a seven-year high of about US$1,590 per ounce in Jan. 6 trading, according to media reports, though London broker SP Angel said it had reached US$1,601/oz on Jan. 7 and was trading around $1,585/oz when the firm sent its note early morning Eastern Time on Jan. 8.

On Jan. 7, Market Watch reported that gold futures marked a 10th straight climb that day, the longest streak of gains in two years.

News portal Kitco said Jan. 9 that gold hit US$1,631/oz before reversing when Iran launched ballistic missiles at airbases in Iraq housing U.S. troops, which Iran's Islamic Revolutionary Guard Corps took credit for in retaliation for the drone attack on Soleimani.

London-headquartered financial advisory INTL FCStone Ltd. said Jan. 9 that though the gains had been unwound by the time its note was sent, as U.S. President Donald Trump signaled a move that day toward de-escalation with Iran, the spike "reflects the market's refreshed awareness of gold's role as a risk hedge."

Equally, the firm said the depth of the correction also underscores the assertion that long-term risk hedgers are "already in the market." Though INTL FCStone had suggested earlier in the week that this constrains the upside, "equally it underpins support" between US$1,500/oz and US$1,550/oz.

Edison Group Mining Sector Head Charles Gibson said in a Jan. 7 note that the upsurge of tensions in the Middle East between Iran and the U.S. has "uncanny echoes" of the Iran hostage crisis in the late 1970s.

Gibson said the price spike supported Edison's thesis set out in an August 2019 report that highlighted that conditions in the world economically and politically are more akin to those in the late 1970s when gold was still in a bull market than the early 1980s when it was in a bear market.

"As a result, the current price of gold — US$1,560/oz at the time of writing — is approaching our forecast for 2020 of US$1,635/oz," Gibson said.

"Nevertheless, while the gold price will react to perceptions of geopolitical risk in the short term, in the longer term we do not believe that it will top out until real interest rates (defined as the Fed funds rate minus CPI) in U.S. dollar terms reach 4% — exactly the same as in the period 1970-1981."

S&P Dow Jones Indices noted Jan. 8 that across commodity markets, precious metals and the petroleum complex led the way for the S&P GSCI to increase 17.6% for 2019.

This was the S&P GSCI's 10th-strongest performance since 1990 and its best annual return since the heights of the so-called commodity super cycle in 2007.

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Gold proved to be one of the most popular assets for investors in 2019, with the S&P GSCI Gold Index posting its best performance since 2010.

S&P GSCI Gold gained 18% thanks to safe-haven buying courtesy of escalating geopolitical tensions, a protracted trade war and central banks' quantitative easing, Indices Head of Commodities Fiona Boal said.

"As more government bonds across the globe displayed negative yields throughout 2019, gold remains well positioned as a safe-haven alternative for investors going into the new year," Boal added.

Palladium's use in cars to defuse emissions continued the commodity's multiyear price rise, with the S&P GSCI Palladium finishing 2019 64.3% higher in 2019.

Nickel was the standout industrial metal for the year, with the S&P GSCI Nickel ending 2019 up 32.8%, though well below the five-year high of US$18,850 per tonne the London Metal Exchange three-month nickel price reached in September 2019 on news that Indonesia would expedite restrictions on nickel ore exports to the end of 2019 from January 2022.

S&P GSCI Iron Ore closed 2019 83.1% higher, which Boal said was a function of persistent Chinese steel demand and several significant supply curtailments including the major tailings breach at Vale SA's Feijao iron ore mine in Brumadinho, Brazil, in January.

S&P Dow Jones Indices is a joint venture between CME Group and S&P Global Inc., which also owns S&P Global Market Intelligence.