UAE and global investors should apply risk management rules to help reduce the impact of unexpected moves in gold prices.
old prices have been fluctuating wildly in the past few weeks due to tensions between the US and Iran, denting the safe-haven status of the precious metal.
The fast-changing dynamics of the US-Iran relations have been creating ripples in the market, with gold, on some days, dropping over nine per cent to put it on course to steepest fall since 1983, and then, on other days, it is recording the biggest daily gains since 2008.
The prices hit as high as over $5,500 per ounce and then slumped below $4,700 within days. Gold prices in Dubai fell by Dh100 per gram within a few days, reflecting the highly volatile times for the markets.
On Wednesday evening, gold was trading at $5,061 per ounce, up 3.1 per cent. In Dubai, the 24K and 22K gold were selling at Dh609 and Dh563.75 per gram, respectively.
Gold plunged when news of talks between the US and Iran surfaced, but prices bounced back after a US fighter jet shot down an Iranian drone that approached the US aircraft carrier Abraham Lincoln in the Arabian Sea, prompting investors to rush to safe-haven assets like gold.
What to watch out for when investing in gold
George Pavel, general manager at Naga.com Middle East, said tensions between the US and Iran are bullish for the yellow metal as they fuel geopolitical concerns.
However, he stresses, the planned US-Iran talks could help reduce investors’ concerns and put pressure on the gold market, although progress remains fragile and the situation could shift rapidly, fuelling volatility in the market as investors reprice the probability of escalation in a strategically critical region.
Pavel adds: “When investing in gold during rising geopolitical tensions, risk dynamics, geopolitical developments and other fundamentals should be a focus. Gold typically reacts to sudden changes in perceived escalation risks. Short-term rallies could be driven by hedging demand and can fade quickly if tensions stabilise or diplomatic progress materialises.”
Look for other factors, too
Analysts cautioned that there are many other factors as well that investors should watch out for – not just US-Iran tensions – such as interest rates decisions and central bank buying.
“Gold reacts to other factors such as interest rates or central bank demand, which could drive price action as well,” adds Pavel.
According to Michael Brown, senior research strategist at Pepperstone, it is hard, and perhaps unreasonable, to put a significant degree of gold’s recent upside down to these factors alone, with the rebound being more of a mechanical one than anything else, though ongoing haven demand remains a key part of the underlying fundamental bull case.
“This case, incidentally, remains a robust one, not only amid elevated geopolitical risk, but also as central banks continue to diversify reserves, and retail portfolio allocations to bullion continue to increase. In simple terms, what we saw was prices get far too far ahead of themselves, hence triggering the large momentum unwind at the tail end of last week,” said Brown.
Protective measures
George Pavel suggests UAE and global investors should apply risk management rules to help reduce the impact of unexpected moves in gold prices.
“Adopting disciplined position-sizing ensures gold exposure reflects its role as a safe-haven asset rather than a speculative position. Using a well-defined strategy helps reduce the risk of buying or selling emotionally in times of volatility. Diversification across assets is also crucial, as markets can react differently to the same catalysts, reducing the overall impact on a portfolio,” says Pavel.
Finally, Naga.com’s general manager believes that strong research can help distinguish between temporary incidents and sustained escalation, and their impact on the market.
