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Why U.S.-Iran tensions are not a good reason to buy gold

Section: Daily Dispatches

By Myra P. Saefond, New York
Monday, January 6, 2020

Gold's haven appeal amid mounting U.S.-Iran tensions and uncertainty in the Middle East could turn sour following the precious metal's recent price rally to near seven year highs.

"The geopolitical instability is adding fuel to the fire," said Maria Smirnova, senior portfolio manager at Sprott Asset Management, following a sharp rise for gold in 2019. "How lasting the boost to the gold price will depend on how the Iranian situation unfolds and whether it escalates," and that situation may get "worse before it gets better."

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Still, it would not be a surprise if gold were to "consolidate its gains or correct after this pop" in prices, she said, while adding that a big downturn is not likely in the cards if that happens.

Gold's latest rally comes on back of last week's U.S. airstrike near Baghdad's airport that killed General Qassem Soleimani, one of Iran's top military commanders. On Sunday, Iran said it would no longer abide by the 2015 nuclear deal, which the U.S. had already pulled out of in 2018.

On Monday, February gold rose $16.40, or 1.1%, to settle at $1,568.80 an ounce on Comex, marking the highest most-active contract finish since April 9, 2013, according to FactSet data. Prices also tallied a ninth consecutive rise, the longest streak of gains since the 11-session climb ended on Jan. 5, 2018.

Brien Lundin, editor of Gold Newsletter, however, said he thinks "geopolitical events aren't a good reason to buy gold."

"The price almost always spikes before most investors can buy it and drops well before they can sell it," he told MarketWatch. "So outside of high-frequency traders or insiders, everyone else ends up holding the bag."

He also said these events "aren't a logical reason to own gold since only those people in a specific troubled region might find the events a reason to actually own the precious metal."

The gold market was "just beginning to get wider acceptance of the fundamental monetary issues that are driving the price of gold higher," said Lundin. "Now the market may confuse the driver as being geopolitical in nature, and the inevitable correction once things calm down may damage the outlook for gold."

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