A fragile truce between the US, Israel and Iran is keeping commodity markets on edge this week as investors brace for more downside risk to the price of gold.
Having gained 1.2% on Tuesday after the US and Iran announced a two-week ceasefire, the price of bullion edged 0.29% higher on Wednesday and was little changed on Thursday — still about $600, or more than 8%, lower than at the start of the conflict.
The lacklustre performance suggests traders are hedging against a collapse in negotiations.
Iran’s reported demands offer cause for scepticism. The country apparently wants to retain control of the Strait of Hormuz, a demand the US is certain to reject, and has proposed charging fees to escort international tankers through the channel. It is also demanding compensation from the US for war-related damages.
Iran has already threatened to withdraw from the agreement in response to Israel’s continued offensive in Lebanon, which it says violates the terms of the ceasefire.
The World Gold Council, an industry body backed by the world’s biggest gold miners, warned that a collapse in the peace process would probably force another round of gold sales, potentially reversing the gains since the ceasefire was announced.
The fallout for mining companies, which make up more than a third of the JSE top 40, would then put pressure on the all share index.
Despite a moderate recovery since the ceasefire, gold has yet to recover from its March sell-off, when the price plunged about 12% to $4,608/oz — the weakest month since June 2013. That fall had come when former US Fed chief Ben Bernanke said the US bond-buying, which had propped up the economy since the global financial crisis, would soon be tapered, resulting in what became known as the taper tantrum.
In its latest monthly market commentary, the gold council said it saw signs of a return to gold’s positive trend. Still, it warned that short-term risks remained, including central bank mobilisation and further deleveraging.
Central bank sales, or at least speculation in that regard, have been an important factor in gold’s drop since the start of the Iran war. The metal’s liquidity is key to its role as a reserve currency, and at present prices, bullion offers an easy source of cash for countries concerned about oil prices, fiscal stress or defence funding.
Turkey’s central bank, a prominent buyer of gold since 2017, reportedly used about 50 tonnes of gold as collateral to stabilise its currency and protect its economy from the fallout of the war.
According to the gold council, the move isn’t new. Turkey undertook a similar scale of sales and swaps during Covid-19 and in response to a devastating earthquake in early 2023.
“[March’s sell-off] is a reminder that gold is not a contractual hedge. Prices rise only when incremental buyers exceed sellers. In March, deleveraging and liquidity needs tilted that balance in favour of sellers,” the gold council said.
Even if peace talks hold beyond the next two weeks, the war’s damage to energy infrastructure, such as Qatar’s liquefied natural gas terminals, could take years to repair, putting prolonged pressure on energy markets.
While oil prices slumped by about $15 a barrel after Tuesday’s ceasefire announcement, they have since edged back up towards $100 a barrel, peaking at $99.40 on Thursday.
The gold council estimates that prices above $100 for an extended period could risk further sales of gold by central banks — particularly “given that the somewhat muted response [to the oil shock] was reportedly due to buffers that no longer exist”.
“As such, while fundamentals remain supportive, price action in the near term is likely to remain sensitive to conflict-driven liquidity needs rather than macro signals alone,” it added.
With prices volatile, gold miners will be eyeing the rising cost of diesel with growing concern. The fuel is a core input cost across their operations, and price increases mean further margin pressure.
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