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CPM Group: Time to 'take profits' after gold surges in wake of Soleimani's death

Amid heightened tensions in the Middle East after the U.S. killed Iranian military commander Qassem Soleimani in a Jan. 2 airstrike in Iraq, analysts pointed to possible upside in the price of gold as a safe-haven asset while also advising caution in near-term trading.

"Our view ... is to take profits and stand aside to see if things calm down and prices subside," CPM Group Managing Director Jeffrey Christian said in an email.

Gold surged in the wake of the assassination, hitting a seven-year high as it climbed to about US$1,590 per ounce in trading Jan. 6, according to media reports. Before the White House announced the airstrike, the price of gold had closed at US$1,527.80/oz in London.

Some analysts expect gold to continue to climb if the confrontation escalates. Goldman Sachs analysts said in a Jan. 6 note that gold shows strength during spikes in geopolitical tensions that are severe enough to debase currencies.

"This most often happens during wars or military escalations. Accordingly, we found that gold performed well, even controlling for real rates and dollar weakness, during the beginning of both Gulf wars and during the events of September 11, 2001," the analysts said.

Goldman Sachs said it saw upside in the price of gold should the U.S.-Iran confrontation worsen, while it maintained three-, six- and 12-month gold price forecasts of US$1,600/oz. The analysts also noted that rising Middle East tensions add to economic factors, such as sluggish manufacturing late last year, that drove gold prices higher in 2019.

"The final leg of the rally on Friday was triggered by a negative surprise in the US manufacturing ISM and escalation in the US-Iranian geopolitical tensions," the analysts said.

Christopher Louney, a commodity strategist with RBC Capital Markets, said the confrontation in the Middle East is a key factor in helping buoy gold as it trades near multiyear highs. "We went into 2020 calling for risk and uncertainty to be the differentiating factor for gold's price performance," Louney said in an email. "In our view, the Iran-U.S. tensions are playing an important role in supporting prices at current levels."

RBC Capital Markets forecast the price of gold averaging US$1,547/oz in the first quarter of 2020, in part because of geopolitical risk, Louney said. With rising Middle East tensions, the analyst said RBC Capital Markets remains confident in the price projection.

"For the balance of the year, we eye not only these geopolitical concerns but also trade, politics and, importantly, any related economic concerns when assessing our base case and high/low scenarios," Louney said. In a Jan. 2 note, RBC Capital Markets pegged its high and low gold price forecasts for 2020 at US$1,613/oz and US$1,437/oz, respectively.

In the wake of Soleimani's assassination, U.S. President Donald Trump and Iranian leaders have traded barbs, raising fears of a more direct military confrontation.

Iran has vowed to retaliate. Iranian military leader Esmail Ghaani, Soleimani's replacement as leader of the Islamic Revolutionary Guard Corps' elite Quds Force, said, "certainly actions will be taken," according to media reports. The promise of reprisal followed Iran's declaration that it would no longer hold to uranium enrichment limits it has agreed to in recent years.

Addressing Iranian reaction to the assassination, Trump tweeted Jan. 5 that the U.S. could respond to an Iranian attack in a "disproportionate manner." He also tweeted Jan. 6, "Iran will never have a nuclear weapon."

Christian, in advising caution on gold price action, said he saw Iran responding to Soleimani's death with an indirect attack given U.S. military superiority. "This has been the pattern in the past, and we would expect it to repeat given the military imbalance," Christian said.