By Carsten Menke
The attacks on the Saudi Arabian oil infrastructure boosted gold earlier this week
The attacks on the Saudi Arabian oil infrastructure boosted gold yesterday. Prices gained as much as 1.5 percent but ended the day below the much-watched $1,500 per ounce level. Gold is a hedge against inflation uncertainty, which has risen as a result of the attacks.
Geopolitical risks have likewise risen as further attacks could follow. However, to have a lasting impact on gold, much higher oil prices would be needed, i.e. well above $80 per barrel, in order to trigger a major inflationary shock, hitting the economy and slowing global growth.
Looking back at the invasion of Kuwait in 1990, when the oil market last experienced such a substantial supply disruption, gold gained around 10 percent within a couple of days but traded lower over the following weeks despite the military escalation in the region.
Independent of the oil attacks, we reiterate our constructive view on gold. The still shaky global growth environment, the relatively big risk of another escalation of the US-China trade tensions and the outlook for more monetary easing by the world’s major central banks provide a favourable fundamental backdrop.
Safe-haven demand should stay strong, pushing prices higher at least in the short term. Medium to longer term, gold’s outlook very much depends on the question of whether monetary easing will prevent the current economic slowdown from become a downturn, i.e. if a recession can be avoided.
Carsten Menke, Head of Next Generation Research, Julius Baer