The conflict in the Middle East may turn into an extensive and prolonged war. It may also affect the rest of the world.
We hope for a fast resolution, of course, but it doesn’t seem likely.
While it’s too early to speculate on the time frame and possible consequences, it will be wise to prepare for the worst and shift into defensive mode.
After all, even the most remote wars often affect investors’ portfolios.
Investors have already faced increased volatility in most sectors. This includes stock markets, fixed-income assets (bonds), commodities, and other asset classes.
In such uncertain times, protection is paramount.
And the best defensive asset for investors is gold.
The yellow metal has been around for thousands of years and maintained its value against other assets.
This is why a lot of investors already shifted their focus toward gold.
Over the last two weeks, the metal gained over 8%. Fear is the primary driver of investors’ interest.
They are not looking to profit this way but rather to protect their capital.
If the war in the Middle East persists, they will keep increasing their gold positions. Such buying activity will push prices higher.
The most likely outcome of a prolonged war is higher gold prices.
However, if the gold prices remain high enough for long enough, there could be a class of stocks that can benefit from such a setup.
We’re talking about gold-producing companies.
Gold Mining Companies Could Deliver Outsized Returns
Gold miners keep producing the metal no matter how volatile its price is. It will take a major drop in gold price for them to consider putting their operations on hold. However, the increase in the metal price will be welcome news.
See, a $150 change in the price of gold (per ounce) won’t alter their production guidance. Yet, it will have a big impact on their margins.
In the last two weeks, gold price has gained $150 or 8%. For gold producers, it can translate into a much higher margin expansion.
For instance, a gold producer with a cost of $1,500 per ounce can boost its margin from around $330 to $480 or 46% per each produced ounce. This will likely lead to higher profits and share prices.
Major investment banks already started altering their near-term outlook for gold. JPMorgan sees gold price rising to $2,175 per ounce by the end of 2024.
There is no guarantee that gold will reach this exact price. But it means the bank will advise their client to increase their allocations to gold.
Investors better be aware of that and keep watching the news from the Middle East. If things get worse, we may see gold prices keep gaining momentum. But once the conflict begins to calm down, expect a retreat in the gold prices.
Investors will sell the ultimate safe haven asset and shift their focus elsewhere. But we are not there yet.
Again, we hope that conflict in the Middle East will be short-lived. But it will be prudent to prepare for alternative scenarios as well.
Thank you for your loyal readership,
The Financial Star team
