Among other things, conflicts can trigger the movement of the price of gold. Comprehensive data has shown that the price of gold increases during war.
Gold’s ability to stay valuable even during the most excruciating situations makes it different from other commodities. Since time immemorial, gold has been seen as a high-value metal that, even when volatility becomes imminent, stability is somehow still attained.
The Value Of Gold
Gold is pretty valuable. Gold doesn’t change color, it doesn’t rust, and it doesn’t expire. But what makes it highly preferred? After all, platinum, another very valuable metal, is of higher value. Unlike platinum, however, gold is more common and, in most cases, readily available.
The price of gold has been overwhelmingly progressive throughout the years, from a mere $282 at the start of the year 2000 to about $1,113 at the close of 2010. In about a decade, the price of gold increased by up to 400%. On the 8th of September, 2022, the price of gold stays at about $1,704 per oz. (Read the article on the highest gold price ever).
Today, gold comes in the form of bars, coins, and securities. Gold is very accessible and can be purchased from licensed gold dealers. Also, some banks in the United States can serve as authorized dealers to help you get the best gold bars and coins.
With the rise in the value of gold over the years, investors have adopted it as a primary commodity for trading, making gold one of the most traded commodities worldwide. While the volatility of gold prices cannot be ruled out, its value has remained steady even during the toughest times.
What Drives The Price Of Gold?
The price of gold is driven by various factors. Like other commodities, a slight change in human actions could cause significant changes in the price of gold. Geopolitical Development is the main driver of the price of any commodity.
In addition, the action of investors can also change the price of gold. Most of the drivers of gold prices are the same for other commodities. However, unlike many other commodities, the gold price is more stable and considered a safe haven for investors.
Effects Of War On The Price Of Gold
War is arguably the most significant thing a country or region can go through. Violence, malnutrition, death, loss of property, disabilities, and the disruption of economic and social activities are just some of the effects of war.
However, war can also affect the price of certain commodities, and in the case of gold, it causes an increase in its price. Over the years, investors have turned to gold as an alternative currency during destructive events like war and famine.
During the early days of the tensions between Russia and Ukraine, the price of gold went up, the dollar hit a two-year high, silver shot up, and platinum also joined the party, but other commodities like copper, cocoa, and coffee went south.
War itself doesn’t drive the prices of gold. Instead, the activities of humans during war drive gold prices. Even with the devastations caused by war and conflict, many investors have seen it as an opportunity to make good financial decisions. After all, gold is rising!
Russia-Ukraine War: A Case Study
With the war in Ukraine being the most devastating event after Covid and the death of the Queen, there’s no better scenario to analyze. In early 2022 when Putin’s plans became amplified, gold prices went up to $1,830 per ounce, and by the 24th of February, gold was being traded at $1,947 per ounce.
In most cases, an increase in the price of gold during a war is imminent. However, the upward trend of gold prices during the Russia-Ukraine war didn’t last long. Maybe the war was boring, or people just stopped caring.
Contrary to my speculations, studies have shown that the reason for the drop in gold prices during the war in Ukraine was mostly a result of Russia’s slow and weak invasion in invading Ukraine. Most investors expected a fierce and immediate response from NATO.
When their predictions didn’t work out, and other countries seemed to be going about their everyday activities, the hype to invest in commodities reduced, which took the price of gold back to the way it was.
While the price of gold peaked at $2,039 during the war, it dropped to $1,954 just a week later, and as time went on, it continued to go through a steady decline. The price of gold is always predicted to rise during the war, but predictions aren’t always correct.
In 2020 when then President Trump oversaw the killing of General Soleimani of Iran in a bid to “stop the war” and not “start the war,” gold prices reached a seven-year high. Not only did it affect the prices of gold, but it also caused an increase in the price of oil and huge losses to Wall Street stocks.
Other events have also triggered the rise in the price of gold. Events like the US tensions with North Korea in 2017, the Iran-Iraq war in 1979, the invasion of Afghanistan by the Soviet Union in late 1979, the invasion of Kuwait by Iraq in 1990, and even the 9/11 attack in 2001 have caused rises in the gold price.
Generally, just the idea of an incoming war or crisis can trigger an abrupt change in the actions of investors in the trading market. These changes in actions can, in turn, lead to changes in the price and market value of certain commodities.
War itself doesn’t drive gold prices. During the war, the government spends more, borrows more, and puts almost all of its focus on the war. This causes the price of gold, as well as that of silver, to rise.
In most cases, especially when the war becomes too overwhelming on the country’s financial structure, the government resorts to printing money, which causes inflation. In a bid to escape the troubles and losses of inflation, investors find alternatives, and this leads to massive investments in gold.
With more investors buying gold, the price increases, which comprehensively defines why gold’s value skyrockets during devastating events like war.
Also, this guy in this video talks about gold history during the World War II:
Other Drivers Of The Price Of Gold
As stated earlier, the actions of investors could trigger changes in the price of commodities. In 2019, President Trump tweeted, “Iran made a very big mistake!” This led many investors to panic trading on oil knowing that Iran is a major oil-producing country.
We have seen stocks plummet from a tweet from Elon Musk or any other prominent person worldwide. Investors are always on high alert, and slight speculation, even a mere tweet, could affect the price of a commodity.
Other than war and crisis, several other factors could cause changes in the value and price of gold. The financial market is vulnerable to many factors, and some of these factors include:
1. Central Bank Reserves
Besides physical cash, the federal reserves also store gold in large quantities. Today, the US has one of the largest gold reserves in the world, and most of it is stored in the US Mint under the custody of the US Department of the Treasury.
2. Demand And Supply
Gold prices conform to the well-known theory of demand and supply. In most cases, the price of gold increases when the demand for it increases. Gold can be used for making jewelry, sculptures, and many other things.
When the demand for these things increase, the price can also increase.
3. Value Of The US Dollar
The gold market is dollar-dominated. A stronger dollar is proportional to a lower price of gold, while a weaker one is most likely to increase prices. The price of gold moves opposite to the US dollar, giving it an edge over inflation.
Even when the strength of the dollar reduces drastically, gold remains unbothered.
4. Wealth Protection
Since gold is less volatile and less affected by inflation, it can be used to protect wealth during negative economic events like a recession. Because its price remains somewhat steady even during turbulent financial times, investors buy gold to keep their money intact.
A price rise is imminent when more people invest in gold to protect wealth.
Gold Prices Post-War
The price of gold is not entirely steady, but compared to other commodities, it is pretty steady. After all the fluctuations in prices experienced during the war, what happens when the war ends?
When the war ends, and the guns and tanks are taken back to the Sierra Army Depot or wherever they are stored, gold prices stabilize and, in most cases, go back to the original price before the war started.
When the tension between Russia and Ukraine ends, the dollar will likely be firmer, liquidity tightened, and the stock market rebounded. When these things happen, gold will likely be less attractive, and its price may dip.
Geopolitical Developments And The Financial Market
In the future, the financial market will remain vulnerable to even the slightest geopolitical developments. Natural disasters, disease outbreaks, wars, changes in government, climate change, and slow economic growth; are just some of the things that could increase the volatility of the financial market.
Geopolitical development happens all the time, and it is impossible for it to favor everybody. While different people invest using different means, the final aim is usually to make a profit. For some investors, certain geopolitical events favor them, and for others, not really.
The best thing to do is to understand how the financial market works and take advantage of its ever-changing landscape in order to get optimal satisfaction. “one small step for man, one giant leap for mankind.”
Advice To Investors
Depending on the situation, gold, just like any other commodity out there, is not always a good investment. Yes, gold investment can be profitable and satisfying, but just like other commodities, investment isn’t always the answer to all your problems.
Investing in any commodity requires expertise in its usefulness and market value. Everyone usually advises to buy low and sell high, but when it comes to gold in the modern economy, the price is usually steady, at least most of the time.
Laying more emphasis on war, investors are advised to sell their gold bars and commodities when they assume the price has reached a reasonable peak. After selling, they can buy after the war at a lower price.
Gold prices shot up during the early periods of the Russia-Ukraine tension, but experts warn against allocating more than 15% of the total portfolio towards gold. Gold is not a tactical play, and as much as you enjoy making money, it is important to remember that it could end up not favoring you.
The advice given to investors during gold is the same given to investors during any other significant events in the commodities market; buy low and sell high. After all, profit is key, right?
Why Investing In Gold Still Makes Sense
Regardless of the advancements and the increased strength of the US dollar in recent times, gold is still considered a safe haven for investors.
Today, gold is regarded as the most effective commodity to invest in for these reasons:
- High liquidity
- Low volatility
- High value
- Barely affected by inflation
- Great way to save money for the future
- Doesn’t require much maintenance
Undoubtedly, gold is one of the financial market’s best and most traded commodities. Whether you buy for jewelry, investment, or even just to store, Buying gold, over the years, has proven to be worth the spend. The gold market is not a get-rich-quick soon.
It cannot be concluded that gold prices rise during a war. While studies have shown that this may be true, other scenarios have shown otherwise. However, the price of gold is often very likely to increase during events like war.
Martin Thomas, the owner of Sutter Gold Mining, is a true gold investment aficionado. With decades of experience and a wealth of knowledge, he is the go-to source for anyone navigating the vast world of precious metals. Martin has dedicated decades of his life to understanding the intricacies of the precious metals market and the best strategies for maximizing returns. His expertise in this field is unmatched, and his commitment to helping others make informed investment decisions is unwavering. With him as your guide, you’ll gain a deeper understanding of the gold market and learn how to make smart investment choices that will benefit you for years. With his guidance and wisdom, you will never have to worry about taking the wrong investment step again.