Precious metals like gold and silver are often seen as a safe haven asset during times of economic uncertainty. In recent weeks, we have witnessed a significant increase in the number of global conflicts, imposing high uncertainty and risk among markets for investors. Still, the jury is still out on how this will affect precious metal prices as a whole.
As participants seek to hedge against the risks presented by these conflicts, buyers continue to pour money into gold, causing an uptick in demand for precious metals. However, the dollar index, gold, and oil prices are all interconnected. A stronger dollar makes gold and oil more expensive for foreign investors, which can lead to a decline in their prices. Rising interest rates can also make gold and oil less attractive, as investors can earn a higher return on their money by investing in bonds and other fixed-income assets.
Contrarily, a weaker dollar can make gold and oil more attractive to foreign investors, which can lead to a rise in their prices. Falling interest rates can also make gold and oil more attractive, as investors have fewer alternative investment options. Indeed, recent events in the Middle East continue to significantly impact financial assets across markets. The war has thus far caused a sharp increase in gold and oil, leading to rising inflation and more concerns about a global recession.
This, in turn, has led to a flight to safety among investors, who have been frantically buying up assets like gold, silver, and the U.S. dollar. And with global events driving investors into safe-haven assets, gold prices currently show short-term reversal patterns to the upside, as noted on MetalMiner Insights. Indeed, prices for the precious metal recently tapped into support zones near $1800/oz. When the Hamas-Israel conflict began, they bounced back over $1900/oz, demonstrating just how much the war is a major driving force for recent price action in this market.
The Dollar Index, the Fed, and Precious Metal Prices
Prices for the dollar index also increased significantly over recent months. DXY prices increased about 7% since July 2023. This indicates a potential flow of investors pouring in due to anticipated rate hikes from the Fed. Generally speaking, a higher dollar usually leads to a lower gold and silver price. However, when global conflicts began to rise in recent weeks, the dollar index began to show bearish patterns, potentially indicating an incoming downtrend.
Precious metal prices, including gold and silver, continue to trade at historically high rates. And while global conflict and other macroeconomic forces prove the main drivers of current price action to the upside, gold faces pressure within technical resistance zones and bearish price action as markets continue going up. This is due to price ceilings forming near the all-time highs, just past $2000/oz. While investors and other market participants often seek opportunities during times of war, markets remain uncertain due to a number of factors. Some prime examples include inflationary risks, geopolitical conflict, supply strain, and weaker emerging markets.
Market Trends Remain Hard to Predict
Ultimately, the near term outlook for the dollar index, precious metal prices, and oil markets is uncertain. The war in the Middle East, Ukraine, macroeconomic events, rising inflation, and the prospect of aggressive interest rate hikes from the Fed will all likely continue supporting the dollar index. However, other factors, such as concerns about a global recession and increased oil supply, could weigh on gold and oil prices.
Overall, the recent conflicts have had a mixed impact on precious metals and the dollar index. On the one hand, they have increased demand for safe-haven assets like gold and silver. On the other hand, the war has also strengthened the U.S. dollar, which has been a headwind for precious metals prices.
By Jimmy Chiguil