CUR - Gold: The Safe Haven Asset Could Lift Off As Geopolitical Risks Worsen

2023-10-09 10:30:00 ET

Summary

• The clash between Israel and Hamas could escalate into a regional conflict, impacting the global economic recovery.
• Iran's alleged involvement in supporting Hamas could worsen geopolitical tensions and potentially lead to another oil crisis.
• The escalating conflict could shape a buying opportunity for high-conviction investors in gold, considered a safe haven asset.
• GLD was already oversold last week and saw firm dip-buying support, potentially helping it bottom out.
• The worsening geopolitical crisis could see more gold buyers return as they rotate into gold to mitigate headwinds in the equity markets.

The Middle-Eastern conflict erupted over the weekend as Hamas militants launched an unprecedented coordinated surprise assault on Israel's border towns. As such, it could give gold ( XAUUSD:CUR ) bulls renewed fervor on its recent bottoming process, benefiting SPDR Gold Shares ETF ( GLD ).

The conflict between Israel and Hamas could threaten to escalate into a regional conflict, undermining the global economic recovery that's still fending off challenges from elevated inflation and interest rates.

Iran's alleged participation in Hamas' detailed planning and support could trigger a military response from Israel's defense forces, worsening the geopolitical tensions and possibly leading to another oil crisis.

As such, the war premium has risen significantly at an inopportune time for the equity markets ( SPX ) ( NDX ) as buyers attempt to shake off September's weakness into a seasonally strong Q4.

Notwithstanding the intensifying tensions, I have already anticipated that gold mining stocks could hold their lows after suffering a massive battering in my recent articles on Barrick Gold ( GOLD ), Newmont ( NEM ), and Agnico Eagle ( AEM ). Investors were justifiably concerned about the recent surge in bond yields, which saw the 10Y Treasury yield ( US10Y ) spiked to nearly 4.9% last week. Given the exposure of the leading gold mining stocks to the underlying gold prices, it's imperative for gold buyers to return and support gold prices from stuttering further.

While I'm emotionally affected by the escalating conflict that has seen thousands of lives lost between the Palestinians and the Israelis over the weekend, I recognize that it could also be a moment of respite for gold holders.

Gold is widely recognized as a safe haven asset. It last surged toward its highs in May 2023 but was decisively rejected at a critical resistance zone. Astute operators would have observed the "triple threat" bull trap (false upside breakout) in underlying gold prices at the $2,090 level. As a result, GLD was also battered, falling nearly 12% through last week's lows.

Notably, it formed a bear trap (false downside breakdown) on its weekly chart, attracting dip buyers looking to help GLD bottom out. With the war premium rising due to a potential escalation in the Middle Eastern conflict, it could help GLD recover its momentum at a crucial time. As such, I believe it's a significant opportunity for high-conviction investors to consider buying its steep pullback, as they anticipate a further re-test of its May 2023 highs.

As seen above, GLD has collapsed back into its 200-week moving average or MA (purple line) and re-tested its February lows. However, GLD's price action indicates a subtle bear trap, as dip buyers returned with conviction toward the close of last week's trading (pre-conflict).

Furthermore, GLD remains well above its October 2022 lows, which I expect to stay robustly defended. With the escalation of the conflict between Israel and Hamas, I anticipate more robust buying sentiments for investors seeking the allure of gold's security. It should also take some sheen off the spike in bond yields, helping to mitigate recent headwinds from bond sellers.

A further support zone at the $160 level is possible but unlikely for now. With gold oversold, I expect a liftoff in buying momentum that could see gold outperforming the market in the near term.

Rating: Initiate Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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