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Goldman calls gold a better hedge than oil

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(Kitco News) - Goldman Sachs is calling gold a “better hedge than oil” in the wake of U.S.-Iran tensions.

Around 11:30 a.m. EST Monday, Comex February was up $14.10 to $1,566.50 an ounce. This meant gold was up 0.9% for the day, while March Brent crude oil was up a more modest $0.4% to $68.88 a barrel.

Gold and oil both rose Friday, then gained some more on Monday, after a U.S. airstrike in Baghdad killed Qassem Soleimani, commander of Iran’s elite Quds Force. Iran’s new military leader has threatened revenge.

“While tensions in the Middle East have undeniably escalated with Iran reportedly committing to retaliating, we believe that the current risk premium embedded in Brent prices (through time spreads) is already elevated, with an actual supply disruption now necessary to sustain oil prices near current levels of $69/bbl [barrel],” Goldman said in a research report on Monday.

Meanwhile, the bank said, “history shows that under most outcomes, gold will likely rally to well beyond current levels. This is consistent with our previous research, which shows that being long gold is a better hedge to such geopolitical risks.”

Oil has risen to the highest level since the attack on Saudi Arabia’s Abqaiq facility last September, Goldman said. However, Goldman said, the market has effectively already priced in an outage of 800,000 barrels a day for three months or a 30% chance of a 2.7 million-barrel-per-day outage for three months. Further, the aftermath of Abqaiq attack shows the market has “significant supply flexibility” when Brent is around $70 a barrel, even before shale production rises, suggesting “only moderate upside” in oil from here, Goldman said.

Meanwhile, even before gold’s recent leg higher, the precious metal had gained more than $100 an ounce over the past month, Goldman pointed out. The precious metal was aided by a weakening U.S. dollar and rising inflation expectations, combined with still-weak economic growth.

“We found that spikes in geopolitical tensions lead to higher gold prices when they are severe enough to cause currency debasement,” Goldman said. “This most often happens during wars or military escalations. Accordingly, we found that gold performed well, even controlling for real rates and dollar weakness, during the beginning of both Gulf wars and during the events of Sept. 11, 2001. Therefore, additional escalation in U.S.-Iranian tensions could further boost gold prices.”

Goldman analysts said they are sticking with their three-, six- and 12-month forecast of $1,600 an ounce, but added that they “see upside risks if geopolitical tensions worsen.”

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