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Gold better hedge than oil during geopolitical tensions, says Goldman

FILE PHOTO: A one kilo gold bar is displayed in a shop in Dubai's gold souk, April 11, 2006. REUTERS/Tamara Abdul Hadi/File Photo

(Reuters) - Goldman Sachs on Monday maintained its three-, six- and 12-month forecast for gold at $1,600 per ounce, contending safe-haven bullion to be a better hedge than oil during phases of geopolitical uncertainty.

“The range of potential scenarios is very large; spanning oil supply shocks or even oil demand destruction — which would be negative to oil prices,” the Wall Street bank said in a note, adding under most outcomes gold is likely to rally beyond the current levels.

Over the weekend, U.S. President Donald Trump threatened sanctions against Iraq after Baghdad demanded that American and foreign troops leave, amid a growing backlash over the U.S. killing of a top Iranian military commander.

Concerns about a further escalation in the Middle East tension sent gold prices to their highest in almost seven years, with Trump threatening to strike back if Tehran were to retaliate.

The bullion is often seen as an alternative investment during times of political and financial uncertainty.

“Spikes in geopolitical tensions lead to higher gold prices when they are severe enough to cause currency debasement,” the bank said, adding that an escalation in U.S.-Iran tensions would boost bullion further.

It is not a given that any potential retaliation by Iran would target oil-producing assets, Goldman said, implying that recent attacks on the U.S. embassy in Baghdad did not disrupt any neighboring oil fields.

Crude prices surged on the back of heightening tensions in the Middle East.

Goldman added that demand for base metals could weaken and economic activity would dampen on further escalation in geopolitical tensions.

Reporting by Asha Sistla and K. Sathya Narayanan in Bengaluru, Editing by Sherry Jacob-Phillips