What impact can the ongoing Israel-Hamas war have on gold prices?

Having delivered double-digit returns, gold has emerged as one of the best-performing asset classes since 2018. The period has seen unprecedented upheavals in the global economy, marked by a global pandemic and a major war, resulting in high inflation and recessionary trends. These factors have fuelled the interest in gold. In rupee terms, the price of gold has nearly doubled since 2018.

Adhil Shetty, CEO of banking services platform BankBazaar.com, says a rise in gold prices can be observed any time a new conflict starts. “The recent spike notwithstanding, gold has delivered moderate returns over the long term, while equity has been a much better hedge against inflation [during this period].”

Typically, gold is a crisis commodity whose prices peak during geopolitical conflicts and economic uncertainties. With demand for gold increasing during these periods, analysts expect physical gold and gold-backed securities such as bonds and mutual funds to outperform.

“While the conflict between Israel and Hamas has increased [gold prices], any escalation in the ongoing unrest from another country could continue to support gold prices on lower levels,” says Manav Modi, Analyst for Commodity and Currency at MOFSL.

But one should keep in mind that the Israel-Hamas war has a limited impact on gold prices. While the war has pushed gold prices up by roughly 1 per cent, there is no major risk aversion in the markets due to it. Praveen Singh, Associate VP for Fundamental Currencies and Commodities at Sharekhan by BNP Paribas, says, “Gold is being helped by a sharp fall in the US yields and a weaker dollar.” He adds that the Israel-Hamas war has contributed 1 per cent to the rise in gold prices. The remaining 1 per cent has come on a weaker dollar and lower yields. “If the ongoing war doesn’t drag any other countries, especially Iran, into this conflict, gold will find it difficult to extend its rally beyond $1,900,” he says.

But gold is expected to continue doing well if these uncertainties remain in play. However, analysts say one cannot be sure whether this will be a short- or long-term rise, hence investors should avoid playing the guessing game when it comes to returns and risks.

@imNavneetDubey