What's Behind the Sell-Off In Gold on Tuesday?

Key Takeaways

• Mining stocks including Newmont, Barrick and Freeport McMoRan are getting battered as gold gives back some of the gains posted yesterday after the start of an armed conflict in the Middle East.
• Research shows boosts in metal prices amid large-scale conflicts tend to dissipate as uncertainty clears.

Intensifying conflict in the Middle East is driving stocks, bonds and even some safe-haven assets lower on Tuesday.

One of those have typical havens, gold, is down sharply after surging in the immediate aftermath of the initial strikes on Iran over the weekend. That’s dragging mining stocks down along with it.

The SPDR Gold Trust (GLD), a popular exchange traded fund tied to the price of gold, was down 4% recently, as the spot price of the precious metal dropped to around $5,130 an ounce, after hitting a high above $5,400 yesterday. Meanwhile, shares of Newmont (NEM), the world’s largest gold producer, fell more than 8% to pace S&P 500 decliners, while miners Barrick (B) and Freeport-McMoRan (FCX) also tumbled.

The sell-off in mining stocks would make sense given they tend to move with metal prices, but investors are more than likely puzzled by the latest action in gold—a haven asset expected to outperform when tensions run high. Turns out, conflict-related price gains are easy come, easy go, according to commodity experts. Plus, commodity prices tend to move in the opposite direction of another haven asset, the U.S. dollar, and the greenback is gaining.

WHY THIS MATTERS TO YOU

While gold is often used as a hedge against the market volatility associated with geopolitical concerns, price gains during at the start of a major conflict rarely last.

“Conflict-driven risk premiums in gold can be sharp but hard to sustain,” JPMorgan’s global commodities research team including Gregory Shearer said in a recently published report.

Gold prices have surged during past large-scale conflicts in the Middle East and North Africa region, they wrote, but “ultimately proved fleeting as more certainty around the situation emerged.” That was the case in the 1980 Iran-Iraq War, the 1990-1991 Gulf War as well as the 2003 Iraq War. The firm remains bullish on gold, with a yearend price target of $6,300.

Related Education

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Meanwhile, the dollar is strengthening against other major foreign currencies, which in turn appears to be weighing on gold prices as the precious metal tends to move inversely with the greenback. The U.S. dollar index, which measures the value of the buck against a basket of six major foreign currencies including the euro, the pound, and the Japanese yen, was up nearly 1% in mid-afternoon trading Tuesday, at its highest level since mid-January.

“A major reversal in the currency markets is reverberating across the world as the US dollar safe haven trade is in full force,” Jamie Cox, managing partner at Harris Financial Group told Investopedia.

Other precious metals were also losing ground on Tuesday. Spot silver prices were down about 7% recently, while platinum and palladium also tumbled.

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