Opinion: What are the factors that really determine the rise and fall of gold?

Gold soared more than 2% on Wednesday, breaking the $ 1,600 mark for the first time in almost seven years. Iran retaliated against the US military base in Iraq, and investors have bought hedging assets. After that, US President Trump and Iranian Foreign Minister tweeted, alleviating the immediate escalation of the situation, and the price of gold fell from a high point, but it was still well supported.

Unless the conflict between the two countries begins to affect expectations of the US economy, the rebound in gold prices triggered by Iran's retaliatory action against the United States is likely to be short-lived.

It is well known that gold has played a hedging role in times of conflict and escalating uncertainty. Yet in the long run, it is difficult to determine the price of gold. On the contrary, the actual rate of return in the United States (the rate of return on US debt after excluding inflation expectations) has always been the most important factor affecting the price of gold.

This relationship is not entirely consistent, but there is a close connection between the two. Since the financial crisis, every rise and fall in gold has been accompanied by reverse fluctuations in real yields.

The relationship is straightforward: actual returns represent a risk-free rate. If interest rates rise, non-interest-bearing speculative assets like gold will become less attractive.

Last year, due to a decline in real yields, gold hit its best year since 2010, an increase of about 19%, while the S&P 500 Index grew at its fastest rate in seven years as fears of a recession dissipated. In 2008, when the S&P 500 index fell by almost 40%, and the price of gold barely rose throughout the year, when gold provided little hedging.

Goldman Sachs' head of commodities research Jeffrey Currie pointed out in a study this week that gold surged immediately before the terrorist attacks of September 11, 2001, and the Gulf War. But in both cases, gold has not yielded extremely noticeable returns, as the impact of these events on the broader global economy and real yields on U.S. Treasuries remains limited.

If the conflict between Iran and the United States is so severe that it seriously affects the expected development path of the United States and the global economy, the trend of gold will continue. What determines gold's trend is not the perception of geopolitical uncertainty or investors’ panic.

For traders who are concerned about the next few hours, days, and weeks, gold may provide a way to trade, allowing them to trade their views on the cycle of price increases and declines in the short term. For those looking at more distant fields, actual yields are the most important. 

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