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Safe Haven Demand Boosts Gold and Silver

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Safe Haven Demand Boosts Gold and Silver

panicGold and silver were each sharply higher to open the first trading day of the New Year. A pair of major developments are causing investors to flee into safer territory: a significant slump for the Chinese stock markets and rising tensions in the Middle East between rival powers Saudi Arabia and Iran.

In response, gold rallied $17 per ounce (+1.6%) higher to just shy of $1,080/oz on Monday morning. Silver was also 30¢ higher to $14.24/oz, adding 2.2%. The PGMs saw little benefit from the safe haven flight, however.

Strong Start to 2016

gold demandThe New Year can always be full of surprises, and 2016 is shaping up to be no different. Besides the news from the Middle East and China, some of gold's upward movement is due to traders re-establishing positions (or setting up new ones) now that all of the selling for tax loss purposes ended with the 2015 calendar year.

Gold has now broken through resistance at $1,069/oz and $1,077/oz, but $1,084/oz and $1,088/oz remain near-term hurdles. Support can be seen above $1,050/oz.

Both the S&P 500 and the Dow Industrials ended 2015 in negative territory for the year, though the Nasdaq was lifted by the likes of Apple Inc. Each of the three major U.S. stock indices were down more than 2% on Monday, as global equities followed Shanghai lower. The Chicago PMI reading for last month was also down, helping drag stocks even lower.

Panic in China

Green numbers indicate losses in the Chinese stock market. Green numbers indicate losses in the Chinese stock market.

Apparently, a new circuit breaker used for temporarily stopping trading activity was installed on the Shanghai stock exchange—and it was used in its first day of operation. The Shanghai Composite index fell by a staggering 6.9% overnight, causing a domino effect with stock indices around the globe.

After a 15-minute halt in trading, the circuit breaker had to kick in a second time just seven minutes later. Among other bad indicators, China's factory activity contracted for the 10th consecutive month, and investors couldn't sell fast enough. In the eurozone, however, manufacturing data was stronger than expected.

Tensions Flare in Middle East

iran-saudiThe main driver for Monday's gold rally is renewed fears of war in the Middle East. The tensions between Saudi Arabia and Iran are now at their worst since the 1980s after the Saudis executed a prominent Shiite cleric along with more than 40 other people. The group included Sunni extremists (such as ISIS members) as well as others who were merely supporters of the Arab Spring movement. In the wake of the executions this weekend, Saudi Arabia severed diplomatic ties with Iran, ordering its ambassadors to leave the country by tomorrow.

The most recent clash between the two regional powers is a manifestation of multiple fault lines between two societies: not only is there a Sunni-Shiite divide between Saudi Arabia and Iran, but there is also an ethno-historical Arab-Persian rivalry.

Another factor in this potential conflict besides the boost for the precious metals is its effect on crude oil. The Strait of Hormuz, which connects the Arabian Sea and the Persian Gulf, sees about 35% of the world's petroleum that is traded by sea pass through its waters, making it a potential hotbed of military action if tensions indeed spill over into armed incursions. Crude oil was up sharply on the news, with WTI crude and Brent crude 2.35% and 3.35% higher, respectively.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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