Crude oil, dollar, and gold rose on rising geopolitical risk

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Vrasidas Neofytou
Head of Investment Research

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Crude oil, dollar, and gold rose on rising geopolitical risk

The Israel-Hamas conflict has been the major price catalyst in the global markets on the first trading day of the week, with crude oil prices jumping 4%, while investors pursued safety on the U.S. dollar, gold, and Japanese Yen to cover against rising geopolitical risk.

A surprise deadly attack by land, sea, and air on Israel by Palestinian militants Hamas from Gaza on Saturday morning has resumed fears for oil supply disruption in the oil-rich Middle East, adding upward pressure on the crude oil prices at the opening bell on Sunday night.

The international benchmark Brent initially opened with a gap at nearly $89/b, or 4.5% up, before retreating to near $87.50/b during the day, while the U.S. West Texas Intermediate rose 4.6% to $88.20/b before falling to $85.50/b mark.

Brent crude oil, 1-hour chart

However, the crude oil prices have retreated during the day since the conflict has had a minimal impact on the physical oil market, with not yet any fear of a reduction in oil supply or maritime or land transport in the short term.

The main reason for the smaller-than-expected crude oil gain is that both sides, Israel, and Palestinian-controlled territories such as Gaza are not any major crude oil producers-players on the global energy scene, or the current conflict does not directly put any major source of oil supplies in danger (pipelines, maritime chokepoints).

However, the military conflict has a proximity with the most important oil-producing and exporting area, the Persian Gulf, and next of some of the most neuralgic maritime checkpoints in the world, the Canal Suez in Egypt, the Strait of Aden in Yemen, and indirectly, with the Iranian-controlled Strait of Hormuz in Persian Gulf.

Safe-haven bids on the dollar, gold, and yen:

The conflict in Israel that erupted during the weekend has prompted a move into safe-haven assets of the U.S. dollar, gold, and Japanese Yen, on the back of the rising geopolitical risk, and the risk aversion sentiment.

History taught us that investors prefer the safety of those traditional haven assets to hedge against international turmoil while moving away from risk and growth-sensitive assets, such as stocks, Euro, Pound Sterling, and Australian and New Zealand dollars.

In this context, the DXY-U.S. dollar index gained 0.50% to 106.60, the Japanese Yen rose across the board, while gold and silver added nearly 1% to $1,850/oz, and $22/oz respectively.

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