Here's What You Need To Know About Gold

Geopolitical tensions are rising once again, and traders are concerned about what this implies for their portfolios and the global stock market, particularly gold prices.

Yesterday, U.S. House Speaker Kevin McCarthy met with Taiwanese President Tsai Ing-wen in Simi Valley, raising tensions between the U.S. and China to new heights. Beijing has urged the United States not to intervene in its domestic affairs and has encouraged American diplomats not to lend a hand to Taiwan since China regards the self-governing democratic island as one of its own provinces.

Both McCarthy and Tsai did not mention China at the joint news conference, but the U.S. House Speaker afterwards said in remarks that America should support Taiwan and deliver weapons to the country. He contrasted the situation with Ukraine, claiming that if the U.S. had given the weaponry to Ukraine before the conflict, Russia would have taken a different stance. Chinese authorities warned of decisive steps and called them a "provocation."

These heightened global tensions do not provide the most favorable circumstances for traders, who already have a lot on their plates, such as persistently increased inflation around the world, the aftermath of COVID and the continued dangers to the financial system owing to higher rates, which JP Morgan CEO Jamie Dimon said isn't over yet. Moreover, rising oil prices threaten to undermine central banks' efforts. The escalation of that crisis does not end here: Saudi Arabia, the U.S.'s most important partner in the Middle East, has said unequivocally that the nation is ready to march forward without regard for what is in the best interests of the U.S. The oil-rich kingdom has restricted oil output twice against the wishes of the United States, and it has forged goodwill with its neighboring country, Iran—a country with whom the Saudis have long been at odds. Saudi Arabia has also invited Syria to an important Arab League summit, possibly settling the conflict, and bringing the nation into the Arab inner circle.

The issue here is that the United States is already embroiled in a massive confrontation between Ukraine and Russia. Second, its relationship with China, the world's second-largest economy, is deteriorating by the day. And now, its most important friend in the Middle East is developing ties with its former adversary, Iran. This predicament has led traders to believe that they need to use extreme caution when deciding which asset class to support.

It is commonly assumed that the present surge in gold prices is mostly the result of speculators seeking a safe-haven asset class. This week, the precious metal broke beyond the $2,000 per ounce barrier, and it has been holding this level effectively. But it is also vital to note that most of its rise is due to weakness in the dollar index, which is predicted to fall as the Fed eases off its ultra-hawkish monetary policy. Yet, with oil prices in the upper 80s range, the Fed is likely to continue raising interest rates if they are serious about managing inflation. After all, price stability is more essential to them, and they have yet to show a willingness to make the trade-off with anything else.

At times of heightened geopolitical tensions, traders and investors are, in my view, more inclined to choose less risky assets. It is also feasible that we may see additional gains for other gold alternatives, such as Bitcoin, which has performed pretty well in recent weeks despite the regulatory crackdown by U.S. authorities on crypto exchanges. In conclusion, traders should keep an eye on gold and in the next few months, as both of these asset classes might witness major price rises, particularly if global tensions do not ease.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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