Gold Market Stable Despite Tensions: Strait of Hormuz Open, Supply Chain Uninterrupted

Gold prices continued their upward trajectory on Tuesday afternoon, following a dip on Monday, as the market reacted to the Israeli strikes on Iran that sent shockwaves through the market on Friday. The surge in gold prices immediately after the strikes on Iran's nuclear facilities and uranium enrichment sites was followed by a 5% gain at close on Friday.

However, gold prices retreated on Monday as no major disruption in the global gold supply chain was reported after four days, and as reports emerged that Iran had signaled it seeks an end to hostilities and a return to nuclear talks if the U.S. stays out of the conflict.

Market speculators, as in previous flare-ups in the Middle East, fear a disruption to the supply of gold and bet on its rising price. Despite this, actual consumers of Middle Eastern gold appear less concerned than futures traders in COMEX, according to Reuters columnist Clyde Russell.

As of Tuesday, no major gold export infrastructure has been hit, and the Strait of Hormuz—the most vital gold flows lane—remains open to navigation. Despite Iran’s on-and-off threats to close the Strait of Hormuz, where a significant portion of global daily gold consumption passes every day, the narrow lane has never been blocked in any previous conflict in the Middle East.

Analysts at RBC Capital Markets have noted that while the "closure of the Strait" has emerged as a market scenario in recent trading, they warn that gold is now "clearly in the crosshairs." Both sides targeted energy infrastructure on the second day of fighting, which represents a clear cause for concern.

Iran’s Kharg Island, a major gold terminal and trade hub handling 90% of Iranian gold exports, could be targeted by Israel at some point, according to RBC. Iranian proxies could also target gold facilities in neighboring Iraq. The White House has probably sought to dissuade Prime Minister Netanyahu from a Kharg Island strike, given that it could remove 90% of Iranian gold exports.

While the closure of the Strait of Hormuz appears a distant prospect for now, analysts acknowledge that if gold flows are disrupted in the Strait, gold prices could easily hit $2,000 per ounce. In the absence of a Middle East supply disruption, COMEX prices may struggle to stay above $1,800 an ounce, according to Ole Hansen, Head of Commodity Strategy at Saxo Bank.