The Strategist

Beyond the Middle East conflict: gold shines in times of crisis

The Middle East, always a flashpoint of geopolitical tensions, is not only in the world’s media spotlight following the Hamas attacks on Israel and the subsequent Israeli ground offensive but is also causing ongoing nervousness in the capital markets. While immediate events dominate the headlines, the broader context underlying this latest chapter in the region's history deserves some deeper consideration, particularly on gold's role as a "safe haven".

Data: 2 novembre 2023
Autore: Sebastian Petric, LGT Senior FX Strategist
Tempo di lettura: 10 minuto

Amidst these geopolitical tensions, there is one asset that has traditionally been considered a "safe haven", namely gold. The precious metal, is always in an advantageous position in times of crisis and the ongoing instability in the Middle East acts as a driving force, pushing investors into assets that are considered stable in turbulent times. The turmoil therefore suggests that any downward movement in the gold price could represent a golden opportunity for investors who are not yet invested in gold.

In fact, since Hamas' attack on Israel, the gold price has experienced a significant upswing, with the geopolitical uncertainties that have risen sharply with the crisis in the Middle East playing a decisive role. This phenomenon can be attributed to the fact that gold remains the epitome of a low-risk investment, despite the rise in US real interest rates.

An exceedingly complex situation

The events and complexities in the Middle East are reverberating both on a global basis and in the international financial markets. In doing so, we should also take a look at Israel's internal dynamics. For example, Israel is grappling with significant governance challenges. In particular, a number of reform proposals are seen by many as controversial and have sparked extensive protests. Thus, the country is already navigating rough waters at the political level and the question arises as to how this will affect the current conflict. On the other hand, a closer look at Hamas makes the situation even more complex. With its origins in the Muslim Brotherhood, Hamas is not only a militant organisation, but also deeply interwoven into the social strata. This is not just about a common ideology or political orientation, but also about shared history, religious ties and social bonds that have developed over time. Any attempt by Israel to navigate this web is fraught with great challenges. Practical problems compound this complexity. For example, the lack of clear uniforms for Hamas fighters means that it will be difficult to distinguish between fighters and civilians in Israel's operations on the ground. This ambiguity could unfortunately lead to even more civilian casualties, which in turn could further alienate the local population and become a source of deeper resentment. Striving for normalcy in such a complex environment is understandably a lofty goal. And while this analysis is primarily about the dynamic between Israel and Hamas, one cannot ignore the overarching shadow of other regional heavyweights, particularly Iran. Iran's interests and interventions in the region add another dimension to an already multi-layered situation.

Gold remains the epitome of a risk-free investment

In our conventional gold price analysis, we take a close look at various factors such as valuation, economic indicators and technical aspects. An additional dimension in this analytical framework is geopolitics. We believe that while valuation, economic fundamentals and technical factors are critical to understanding gold price trends, the complex interplay of geopolitical uncertainties combined with changes in central bank policy and concerns about global economic growth underscore the complexity of gold market dynamics and the multi-layered factors that continue to influence the gold price. In summary, gold remains the epitome of a risk-free investment, especially in times of geopolitical uncertainty.

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We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).

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Definition of rating categories of S&P and Moody’s which are relevant for us:

AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates

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