Sanford Mann offers insights into gold and silver investments and the precious metals industry and is the CEO of American Hartford Gold.
Geopolitical events have long shaped the global economic landscape, with far-reaching consequences for financial markets. Gold, in particular, is often viewed as a “safe-haven” asset during periods of uncertainty and conflict, with its price frequently fluctuating in response to global political tensions. Understanding the relationship between gold and geopolitical conflict is crucial if you plan to include it in your financial strategy.
Understanding Geopolitical Risks
Geopolitical risks refer to potential threats or uncertainties that can impact global stability, economic conditions or international relations. These risks can include conflicts between nations, changes in government policies that affect global markets and security, and natural disasters.
The impact of geopolitical risk depends on many factors, including the location and proliferation potential. The impact is also influenced by whether the threat is real or merely perceived. The best-known index to measure risk is the geopolitical risk (GPR) index. It measures both actual and perceived tensions.
Gold As A Safe Haven Asset
Gold is considered a safe haven asset during times of geopolitical uncertainty due to several key characteristics:
• No credit risk: Unlike some other financial assets, gold carries no risk of default, making it an attractive option when investor confidence in traditional markets wanes.
• Negative correlation to risk assets: Historically, gold has typically shown a low or negative correlation with stocks and bonds. When securities falter, gold typically retains or increases its value, buffering against broader losses.
• Inflation/currency devaluation hedge: Conflict can disrupt supply chains and contribute to economic uncertainty, leading to inflation. As inflation rises, the value of paper currency tends to decrease, and the price of gold goes up.
• Liquidity: In volatile market conditions, gold’s liquidity typically allows for quick portfolio adjustments.
Why Gold Prices Rise
Geopolitical conflicts can trigger market volatility. Gold, historically viewed as a reliable store of value during times of uncertainty, is sought by investors both for practical reasons (hedging against inflation and currency devaluation) and psychological reasons (perceived stability). This heightened demand typically results in higher gold prices.
Conflict also pushes central banks to pursue gold to preserve economic stability. Central bank purchases reached record levels in the first half of 2024.
Additionally, gold is playing an outsized role in the accelerating de-dollarization movement. BRICS members, including Russia and China, are acquiring gold and reducing their dollar reserves to defend against Western sanctions. They are also developing a new currency, partly backed by gold, as a counterweight to the dollar.
Lastly, conflicts often snarl supply chains, resulting in inflation. Gold is sought as a hedge against that inflation. More specifically, conflicts or trade disputes in major gold-producing countries such as China, Russia or South Africa can affect the global supply of gold, leading to higher prices.
Geopolitical Events That Have Impacted Gold Prices
Wars And Conflicts
Gold prices have historically risen during wars and conflicts as investors seek stable assets amid growing uncertainty. For example, following the Sept. 11, 2001, terrorist attacks, gold prices increased by almost 6% in a single day, as the shock to global stability prompted investors to shift toward safer investments. When Russia invaded Ukraine in February 2022, gold prices saw a 10% jump. This spike was driven by investor anxiety about the war’s potential ramifications, from sanctions against Russia to disruptions in energy markets.
As tensions between Israel and Palestine escalated in October 2023, gold prices saw an immediate 3% increase. And in April of this year, gold prices reached a record $2,431 amid concerns over an impending Iranian strike.
Political Instability And Elections
Uncertainty during political transitions can also drive gold demand. Gold prices are often a crucial indicator of investor sentiment. Gold surged overnight due to global panic over Britain’s EU exit, rising 22% in sterling.
Trade Disputes
Trade disputes disrupt global trade and economic stability, boosting safe-haven demand. During the U.S.-China trade tensions of 2018-2019, gold prices rose from around $1,250 per ounce in July 2018 to over $1,500 per ounce by August 2019. Notable spikes also occurred after major tariff announcements.
Natural Disasters And Pandemics
The chaos of the Covid-19 pandemic had a significant positive impact on gold prices in 2020. From January to August 2020, gold prices surged by about 30%. In addition to safe-haven demand, non-yielding gold became more attractive as central banks fortified their economies with near-zero interest rates.
This April, gold prices rose after a devastating earthquake in Taiwan. The earthquake damaged the island’s infrastructure and top chipmaking factories.
Managing Expectations
If you’re interested in investing in gold for geopolitical reasons, it’s important to have realistic expectations, though. Gold prices tend to rise in anticipation of a conflict, but when action takes place, the price remains the same or decreases. Traders often “buy the rumor and sell the news.” The initial excitement might lead to a price peak, prompting investors to sell and take profits.
Another key consideration is gold often serves as a bet on the strength of the U.S. economy, rising when confidence in it weakens. If U.S. interests aren’t affected, gold is typically unaffected. When conflicts exist outside the U.S. realm, money tends to flow to U.S. Treasurys as a safe-haven investment.
Conclusion
Geopolitical events can drive gold prices higher as investors seek stability in a safe-haven asset, with price spikes often occurring in anticipation of the event and then subsiding afterward. Barring significant economic disruptions, such as the 1973 Arab-Israeli war, these effects on the markets are usually short-lived.
As of early October, gold stood at over $2,600 an ounce, with year-end predictions of it reaching or breaking $3,000. As a recent JPMorgan Private Bank report stated, “In the end, staying invested in a diversified, goals-aligned portfolio has benefited through countless geopolitical crises, wars, pandemics and recessions.” Placing physical precious metals in a gold IRA can offer long-term portfolio protection from a world wracked with geopolitical conflict.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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