Iran and the Bomb: Gold’s Blast-off?

By Marc Davis, BNW News

Gold prices will surge to unprecedented new highs in the event of a military showdown between Western powers and Iran. This is the consensus among various leading investment industry forecasters.

Among them is Bob Moriarty, the editor of the popular mining investment news and analysis web site, www.321gold.com. A fighter pilot during the Vietnam War, he has some first-hand experience with America’s history in recent decades of embarking upon well-intended but ultimately protracted, unrewarding and unpopular military campaigns.

Moriarty believes that the latest drumbeats of war are reaching a crescendo and the prospect of yet another military quagmire for the U.S. can ultimately only benefit gold – the investment lifeline of last resort.

“The price of gold will go through the roof…You’ll quickly see $5,000 gold. But it will also become radio-active,” he says. “This is because an attack on Iran ultimately will end up with a nuclear war. One that first involves Israel and then the U.S. And it could escalate from there if either Russia or China decides to take Iran’s side in order to protect their access to Iranian oil.”

Since Israel is over a 1,000 miles away from Iran, a conventional ground war – even one spearheaded by air assaults – would not be decisive in Israel’s favour, Moriarty argues. Only a pre-emptive nuclear strike would truly thwart any ambitions Iran may have to build its own nuclear warhead.  Notably, a war could break out within months, he suggests. And the U.S. will be dragged into the fray by an inevitable Iranian attack on U.S. troops in Iraq, he asserts.

Other gold experts are more circumspect in their analysis of how geopolitical events in the Middle East might impact gold prices over the coming year. They suggest that a conventional ground war pitting Iran against Israel (and maybe the U.S. and its allies) could be in the offing. But no Western power, including Israel, would be reckless enough to use nuclear force against the Islamic Republic, they all agree.

Among those holding this prevailing view is New-York based Gijsbert Groenewegen, the founder of the precious metals sector and mining industry oriented Gold Arrow Capital Management hedge fund.  

“The gold will rise to between $1,500 and $2,000 an ounce, if not higher, if a war using conventional weapons breaks out between Israel and Iran,” says Groenewegen. “That’s because the more uncertainly there is in the financial markets, the more people will opt for a flight to safety. And that means gold, which is the most secure investment asset.”

Groenewegen points out that approximately $55 trillion dollars in worldwide investment assets are managed by the financial sector. In stark contrast, only about $260 billion of that sum is allocated to commodities, with gold only accounting for about 10% of that figure.

“So you only need a relatively small influx into gold to drive its price significantly higher,” he reasons. “Depending on the severity of a military conflict, gold could conceivably go as high as $5,000 an ounce. But if the conflict escalates to a nuclear one, then all bets are off.”  

Malcolm Gissen is a mutual fund manager who is especially adept at divining the winds of political and financial change. That’s why his small San Francisco-based Encompass Fund was recently ranked as the top performer for the year to date among 685 global equity funds that are tracked by Morningstar, a financial sector ratings agency. Encompass has earned a 101% return as of the end of September in its broad spectrum of investments, which include a heavy weighting in mining equities.

He believes a military showdown may be hard to avoid in the Middle East and that a pre-emptive air strike by Israel against Iran’s nuclear facilities would quickly drive gold considerably higher. Likewise for an attack against the militant Islamic Republic’s medium-range missile installations. Gissen notes that these recently beefed-up ballistic missiles could eventually carry a nuclear warhead. They also have a range of up to 1,200 miles, putting Israel, U.S. military bases in the region and parts of Europe within striking distance.

“I don’t think President Ahmadinejad is going to make any concessions (to the United Nations) and he is going to call Israel’s hand… So, I see gold going to maybe as high as $1,500 initially. I don’t see it going to $2,000 or higher than that,” Gissen said. “However, if other Arab nations join the conflict and attack Israel and this leads to full-scale war that could go on for months or years, then that could really drive the price much higher than the $1,500 mark.”

Philip Newman is a Research Director at London-based GFMS World Gold – a leading mining equities and precious metals research organization. He suggests that any politically-driven uptrend in bullion prices would likely be short-lived. Especially since the current pricing at around $1,000 an ounce during a severe global recession may already be regarded as too expensive by many traditional buyers of physical gold, such as jewelry manufacturers. Also a present climate of “subdued inflation” will likely continue to keep gold’s price advances in check, he adds. 

“However, if you get a surge in the flight to gold, it could have quite a pronounced impact on pricing. But at the same time, you’ll see profit taking and other forces that effect gold’s pricing which would be at play to perhaps partly constrain gold’s rise… For instance, physical demand such as jewelry is running at a very low level in most key markets,” Newman says.

“But I won’t discount a possible spike to $1,200 or even to $1,500 gold. These prices are always feasible. Yet, you would need such a tremendous rise in investment demand to keep gold at those levels. In fact, I think some people would even see such elevated prices as an opportunity to offload their gold positions. So I’d have to be skeptical about any such significantly higher pricing being sustained.”  

Jeffrey Christian is the Managing Director of the CPM Group – a well-regarded New York-based commodities research, consulting, asset management and investment banking organization. He says that a military attack on Iran’s nuclear program would not necessary escalate to involve the U.S. and other western nations.

“You’d probably see the price spike up initially because investors would run to the protection of gold. But I’m not sure how sustained such a spike would be once people realize that this (military conflict) would not likely be as catastrophic as it could be,” he says.

He believes that an initial price spike would take gold to around $1,200 an ounce. And if it does gather further momentum at that level, he suggests that short-covering by some institutional investors (who have bought options contracts to gamble against gold going higher than $1,200 an ounce) could then precipitate a second spike to $1,500 within days.

“But as soon as the price begins to stall, it would likely come right back down again. It’s probably just not sustainable at the $1,500 level,” he adds.