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On June 25, 2006 an Israeli soldier was abducted by Palestinian militants. On June 28 Israel launched an assault on Gaza. On June 29 gold fixed at $581.40 an ounce, the US dollar index closed at 85.90, and September Crude closed at $74.51 a barrel.
Since June 29 the dollar index has decline by less than 1%, crude is up by less than 1%, and gold has rallied by more than 11%. The conclusion to be made from this action is that gold has, yet again, proven that it is a safe haven during times of crisis.
The crisis currently at hand is the Israeli/Hezbollah conflict and the threat that - either in response to US/UN pressure or to an escalation in the Hezbollah conflict – Iran is about to enter the fray. The story goes that if Iran plays its oil card Crude could quickly top $100 a barrel, and if Iran enters the Israeli/Hezbollah conflict the Middle East could be the birthplace of World War III. With this in mind, the main worry for gold bulls isn’t that August is historically a seasonally weak period for precious metals or that inflationary pressures are about abate, but that a de-escalation in the Middle East conflict could presage a sharp sell-off in gold.
For the long-term gold investor the war premium in precious metals is no reason for alarm. To be sure, even if conflict in the Middle East subsides there is little doubt that another crisis – either of the financial or geopolitical variety - is around the corner. Usurping the US dollar, gold is currently the safest of havens during times of crisis.
In recent weeks I have warned about precious metals making the potentially difficult transition from inflation hedge to crisis hedge. Recent market activity suggests that this transition is going well. In fact, the transition has gone so well that if the US dollar were to soon resume its decline bugs should expect nothing less than new highs in gold.
What if the dollar remains sturdy, Iran/oil fears vanish, and no other crisis point emerges as the US and global economy slows down? Big ifs or not, it could be a long way down for gold.
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