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TheStreet Open House

Gold Will Plummet if U.S. Strikes Syria

Stocks in this article: GLD IAU GG NEM ABX

NEW YORK ( TheStreet) -- Don't buy gold if Western powers militarily intervene in Syria.

Many investors view the yellow metal as an asset hedge against crises, but it's important to interpret Syria as a much more dynamic situation.

"The risk premium for Syria is already built into the price currently, and there would normally be a flight to dollars should conflict arise," said Graham Leighton, a trader at Marex Spectron.

Gold's 2% rise on Tuesday afternoon resulted from traders pricing in the likelihood that the United States and other Western powers would act in Syria, following Secretary of State John Kerry's comments.

At COMEX gold's current price of $1,397.80, the precious metal has fallen 1.6% since Tuesday. This doesn't mean gold is entering a correction period during which it will fall an additional 7% -- an elimination of the total gains in August -- but it does suggest that traders felt the asset may have been overbought.

In interviews with traders since gold's bounce on Tuesday, most mentioned three different scenarios with two likely outcomes for the gold market.

The first is if the West engages in a limited airstrike on Syria; the second is if there isn't any action taken; and lastly is if the airstrike turns into a broader operation with troops in the country.

If the United States or another Western country launches a limited airstrike -- one that lasts a few days or less -- traders said it's probably best to sell gold positions whether they're in gold exchange-traded funds, gold mining stocks or futures.

"The likelihood is that when we see those missiles fly some of the uninformed investors will come rushing in and they'll be late to the party," Jon Najarian, senior economic advisor at Capital Gold Group, said in an interview. "They'll pull the chairs away, and when the music stops those guys won't have a place to sit."

A limited airstrike is what the market initially expected when it popped on Tuesday, and a fulfillment of those expectations would trigger profit-taking among traders as they would see little else to fuel the gains that had been based on a short-term military intervention.

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