Gold has long been hailed as a safe haven in times of geo-political uncertainty. Seen as a store of value, gold can be used as a hedge against uncertainty and tool for preserving wealth. When the threat of war or recession looms proxies for physical gold, such as gold miners and gold ETFs, can appeal.
Iran strikes back
Iran has struck back at the United States (US) following the US drone strike that killed one of Iran’s top military commanders. Surface to air missiles were launched at Iraq air bases housing US troops this morning in what Iran officials said was the beginning of a promised retaliation. The attacks follow 3 days of mourning and add to growing fears of a war between Iran and the US.
Gold has soared in response to the security tensions between the US and Iran. Spot gold reached its highest price in nearly 7 years yesterday, surging 1.5% to US$1579.55 an ounce, and is up again today to US$1,584.96 an ounce at the time of writing.
Gold miners on the ASX have benefitted, with Newcrest Mining Limited (ASX: NCM) shares trading at $31.98, up 3.97% for the day. St Barbara Ltd (ASX: SBM) shares are trading at $2.90, up 3.38% from yesterday’s close. Regis Resources Limited (ASX: RRL) shares are trading at $4.51, up 4.40% since yesterday, while OceanaGold Corp (ASX: OGC) shares are trading at $3.00, up more than 6% from yesterday’s close.
Benefits of gold
Like any commodity, the value of gold fluctuates over time, but it is seen as a defensive asset due to its relative scarcity. Gold can be used to provide diversification benefits relative to stocks – over time its returns have proven to have a low correlation to the returns on equities. Gold can therefore be used to weather periods of market volatility.
Gold can act as a hedge against inflation, and a safe haven in periods of political or economic uncertainty. The Betashares Gold Bullion ETF – Currency Hedged (ASX: QAU) is backed by physical gold bullion held in a London vault. The fund hedges its US dollar exposure to allow for a transparent exposure to the price of gold.
Trump has threatened “major retaliation” should Iran retaliate for the killing of its commander. Now that Iran has done so, it risks triggering a cycle of regional escalation. Fears over how far the US and Iran are willing to escalate the current situation are likely to continue to support hedging with gold.