Is this the beginning of the end?

Last night, President Trump announced that the United States will pause ‘Project Freedom’, the naval operation designed to help escort and protect commercial shipping through the Strait of Hormuz. This comes hot off the heels of Secretary of State, Marco Rubio also declaring the offensive stage of the Iran was "over". While details remain limited markets have interpreted the move as an early sign that tensions between the U.S. and Iran may finally be starting to cool, with a potential resolution in sight.

That does not mean the risk has disappeared entirely. Iran has yet to respond publicly, whilst there are still reports of ships in the Strait of Hormuz being attacked - so progress remains cautious and fragile. However, should this be the beginning of the end of the war, it may also be the same for the bear run that has gripped precious metals over the last couple of months.

Precious metals react quickly

Gold and silver responded strongly to the news, with sharp increases on Wednesday seeing silver climbing 3.2% and gold rising 2.3% at the time of writing. The reaction serves as another reminder that the underlying case for precious metals has not disappeared, with the Iran war simply creating some short-term conditions that acted as a headwind for precious metals. The conflict drove up the price of oil, which led to the value of the dollar increasing due to the US being a net exporter of energy, whilst this also meant the prospect of interest rate cuts have all but gone with speculation of a rise instead.

A resolution in Iran potentially eases those headwinds and all of a sudden exposes the markets once more to the fundamentals that supported precious metals in their record-breaking bull runs from earlier this year. Those fundamentals include inflation risks right across the global economy, central banks continuing to buy gold and diversify away from the dollar, uncertainty within the US Fed and ever climbing government debt. That combination will continue to support demand for traditional safe-haven assets such as gold and silver.

Investors will now be watching closely for Iran’s response, further updates from the US, and any developments affecting traffic through the Strait of Hormuz. Initial signs seem positive, hence the sharp immediate increase, but as ever, things can change quickly when it comes to the modern geopolitical landscape.

In summary

Trump’s decision to pause ‘Project Freedom’ has eased immediate fears of further escalation with Iran, helping lift both gold and silver prices. However, while markets have welcomed signs of de-escalation, geopolitical tensions in the region remain unresolved. The rally in precious metals also reflects the long term broader economic backdrop still supporting safe haven demand, with a resolution in the Iran war potentially exposing the markets once more to those longer term drivers.