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Sun 12 Jan 2020 11:30 AM

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Price of gold expected to consolidate after jump in volatility

Gold price jumped almost $100 in a matter of days to climb above $1,600

Price of gold expected to consolidate after jump in volatility

Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM

The recent acceleration in heightened US-Iran tensions will ensure that investors will not forget the first full trading week of the new decade anytime soon.

Investors witnessed volatility soar across the board, leading to a roller-coaster ride being endured by a host of different financial asset classes including; gold, oil, theUS dollar and Japanese Yen as well as both world and regional stock markets. Of particular note, the price of gold jumped by close to $100 in a matter of days to climb above $1,600 for the first time since April 2013 while Brent and WTI oil prices advanced by $4 and $6 respectively.  

While it has become reasonably clear following comments made by a range of political leaders that all want to avoid a wider conflict, it is still important to highlight what might be next on the cards for gold and oil. 

When it comes to gold it is acknowledged that the US-Iran newsflow is a delicate situation, but the outlook is that there should be a consolidation after the jump in volatility.

The diplomatic narrative at the time of writing and what has been digested as a measured response so far from US President Donald Trump to the issues should ease market volatility levels. This increases the likelihood of a moderation in gold movements, as gold is seen as a safe-haven asset that fluctuates when there is heightened market uncertainty. 

Of course, a hardline rhetoric from either side can change sentiment in an instant but there is at least optimism that relations should not over the near-term escalate in a worse manner than already seen. 

When it comes to oil prices, the outlook is considered clearer as things stand.

It is worth noting that in spite of the jump higher in the initial aftermath of the escalation that the advances did not come close to matching what occurred last year when Saudi Arabian oil fields were attacked.

This suggests that investors are not concerned at this stage that the recent events will lead to disruptions in production output. Unless there is a change in what the region can supply, it is doubtful that oil prices can maintain a higher trajectory. 

Another matter that would appear as disappointing for those aiming for higher oil prices is that the landscape of production output is much more different now than what it has historically been.

For example, the United States is today one of the largest producers of the commodity in the world and has emerged fast in this scene. If there is a material change or disruption in supply, the United States could hypothetically step in to bridge potential gaps.

Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM