Unlike major financial assets such as stocks and bonds, whose price is often negatively impacted by geopolitical tensions, the price of gold tends to rise, attracting investors looking to protect their assets against the volatility in the financial markets. Below we explore the relationship between the armed conflicts and the price of gold.
Israel-Palestine / Lebanon conflict
In the 12 months from the outbreak of this conflict in October 2023, the price of gold has increased by 48%, surpassing the US $2,700 per ounce barrier by the end of October 2024.
This increase is not only influenced by the direct confrontation between Israel and Palestine/Lebanon, but also by the possibility that other major international actors such as Iran and the United States become involved, escalating the conflict and impacting key markets, such as oil.
War in Ukraine
The economic sanctions imposed on Russia, one of the largest exporters of hydrocarbons, caused a rise in the prices of natural gas and other raw materials, accelerating inflation in Europe. In addition, this war prompted a process of de-dollarization, with several countries diversifying their foreign reserves into gold in order to protect their economies against possible Western sanctions. Since the beginning of the conflict between Ukraine and Russia in February 2022, the price of gold has increased by more than 42% by the end of October 2024.
Three Variables Behind the War That Influence the Price of Gold
Although war conflicts and geopolitical tensions are important catalysts for the increase in the price of gold, the real hidden factors behind war that contribute to the appreciation of gold in times of conflict are:
1. Hydrocarbon Market
Geopolitical tensions and economic sanctions, such as those imposed on Russia in the Ukraine war, disrupt international trade, especially in hydrocarbons such as oil and natural gas. A sudden decrease in the supply of these energy sources can cause their prices to skyrocket, generating global inflation and greater economic uncertainty, favoring the appreciation of gold as a safe haven asset.
2. Global Economic Uncertainty
Military conflicts often destabilize local and global economies. Volatility in food and commodity prices, coupled with the weakening of national currencies, generate volatility in the prices of consumer products, production costs and in the performance of companies; and consequently, in the financial markets, generating distrust in the traditional assets. This leads investors to seek safe havens, such as gold.
3. Increased Demand and Disruption in Supply
In times of conflict, governments turn to gold to support their economies, thereby increasing the demand for gold. When warring nations or geopolitical blocs are net exporters of precious metals, or are part of the trade routes for their export, wars disrupt their mining operations, hamper transportation, and raise production costs. Increased demand coupled with reduced supply puts pressure on gold markets, driving up the gold prices as its availability becomes more limited.
Gold in a Diversification Strategy
For investors, gold should not be considered only as an immediate safe haven from crises, but as a key part of a long-term diversification strategy. Its ability to mitigate risks, including war risks, makes it a valuable option for protecting savings.
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