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Gold Will Plummet if U.S. Strikes Syria

If there is no military action taken in Syria, then gold could plummet.

"I really think the market factored in: 'Hey, there's going to be airstrikes, just missiles from above, no boots on the ground,'" said Michael Smith, president of T&K Futures and Options. "If it's anything less than that, the market collapses."

No action would negate Tuesday's 2% surge that was prompted by rumors of military action in Syria. Additionally, the gold market would return to the fundamentals it had been trading on before Syria became a factor. At last week's end, economic data and Federal Reserve policy were the main drivers of the gold price. Economists and analysts forecast that if economic data remains positive -- especially the monthly nonfarm payrolls report -- then the central bank will begin to taper its economic stimulus program. Gold, beyond being an appealing asset hedge in times of crisis, is also seen as a hedge against inflation. So if the Fed pulls back on its monthly purchases of longer-term Treasuries and mortgage-backed securities, the market would view such action as a retreat from inflationary policy.

Finally, if an airstrike turns into a boots-on-the-ground operation, gold may rally. A limited Syria strike likely wouldn't affect broader markets as Syria produces just 50,000 barrels of oil a day -- its major economic driver. Saudi Arabia, for comparison, produces 8 million barrels per day.

Boots on the ground could engage a broader number of actors, including Iran, Russia and China. This isn't to suggest that Syria would become a stage for war between Western powers and others, but the deliberation to expand the force would elicit condemnation from Russia and China -- two countries that sit as permanent members on the U.N. Security Council alongside the U.S., the U.K., and France. And a threat by Iran to engage in the situation would leave many questions as to the stability of the Strait of Hormuz, which is a critical choking point for shipping in the Persian Gulf. The instability that would occur from these events would leave much uncertainty in markets, making gold an appealing hedge against prolonged crisis in an important economic region.
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