What Tension in Iran Means for Gold

WAR!  Better be ready!  Things are getting pretty dicey on the world stage and the Biden administration doesn’t even know how to spell diplomacy!

Amid rising geopolitical tensions on multiple fronts, we’d like to make a single point.  

Iran’s leadership has been virtually assuring the world that it will retaliate for the assassination of Ismail Haniyeh in Tehran.  Iranian President Masoud Pezeshkian insists Iran has a right to respond to aggression.  Whether it will do so, we do not know, but this much is clear:  the region is becoming increasing unstable.  Economic warfare with Iran has been US policy for some time, The US has now bolstered its military presence in the region.  Cruisers.  Destroyers.  Fighters.  Escalation is a clear possibility.

What is Iran’s defensive leverage?  The flow of energy.  Oil.  LNG.   The Strait of Hormuz.  Iran has long been clear that it will act militarily to close the Strait of Hormuz in the event of an attack.

The Strait of Hormuz is a sea-lane between Iran and the Arabian Peninsula. It links the otherwise landlocked Persian Gulf with the Gulf of Oman and the Arabian Sea, providing access to the world’s oceans. Twenty-one miles wide at its narrowest, the waterway is a critical choke point.  88 percent of oil from the Persian Gulf moves through Hormuz.

The world economy will come to a standstill if the Persian Gulf erupts and Hormuz is shut down.  70 percent of the oil leaving the Gulf is headed to Asia.  Asia (and Europe) will panic. Energy prices will skyrocket.   

The price of gold will explode.

The US says it can swiftly reopen the Strait if it is shut down.  Maybe.  Maybe blowing up Nord Stream says something about what USGov can do.  But that’s not good enough, because oil tankers will not go there for a long time even if the Strait can be reopened in weeks or months.  Insuring them will become impossible.

We think the market may agree with our assessment.  Gold is a sensitive barometer of geopolitical risks.  Those with long memories will note the role the Iranian Revolution in 1979 and the taking of 52 American hostages played in the skyrocketing price of gold. 

The threat to energy supplies from a war with Iran may already be factoring into new record gold prices.  Never forget that gold is the world’s currency of choice in times of crisis.

Much higher gold prices can be expected if the shooting starts.

Much higher.