Geopolitics and the gold price
During Friday, October 13, the price of gold in US dollar terms rose almost 3.5 percent due to escalating geopolitical unrest in Israel and a potentially dovish Federal Reserve following September's inflation numbers.
There is much that speaks for a higher gold price going forward, but historically, a major rise as a result of a geopolitical event has often led to an equal or greater fall in the price of gold soon after.
"Buy gold for troubled times" is the yellow stone's eternal slogan. Gold should act as a hedge against everything. Weak currency? Buy gold and hide it in the mattress and give it to your grandchildren. High inflation? Own gold. Is it war? Gold.
Already owning gold and buying gold are two different things. Gold tends, as in the example we are seeing right now, to rise in price, but short-term, during geopolitical unrest which provides a good opportunity for those who already own gold to sell and then buy back at lower levels just days later. Let's take a look at some historical examples.
In the graph above, which shows the price of gold between the years 1989-1999, you can see, for example, how the Gulf War affected the price of gold in the short term, but that just as quickly as the price rose, it also fell shortly afterwards. The events that instead had a large and more long-term impact on the price were when Great Britain left the ERM in 1992 during the Sterling crisis. The fall of the British currency led to investors flocking to gold as a hedge against weak fiat currencies.
In 1996, instead, we saw the price of gold fall from record levels when Switzerland announced that it planned to sell half of its gold reserves. The price of gold then fell from over $400 and bottomed just above $250 before 15 European central banks got together and put a limit on how much gold they could sell. The price then reversed and rose to almost 325 USD in a short time.
After 9/11, the price of gold also rose sharply initially but later fell back. Soon, however, a commodity boom began that would last until 2011 but was also reinforced by Bernanke's decision to bail out American banks and print money to stimulate the domestic economy out of the crisis. The gold price rose over 300 percent during the period.
Between 2010 and today, we have been able to see the effect of Quantitative Easing (QE) on the price of gold, but also witnessed how the commodity cycle that started in the early 2000s peaked in 2011 when investors moved capital from commodities (and thus gold) to stocks. During September 2017, the price of gold rose to a yearly high when North Korea tested nuclear weapons, but the price fell equally during and after other geopolitical events and quickly returned again.
In 2018, the price of gold bottomed out at just under $1,200 and has since rallied to over $2,000 in three peaks in 2020 after Powell went from Hawk to Dove due to a pandemic and accelerated money printing that ultimately caused the Consumer Price Index (CPI) to go from “for low' to 'unexpectedly high' in the short term. The price of gold peaked along with inflation in July 2022 but has since risen again due to an expectation of future interest rate cuts and a deep recession as a consequence of the severe austerity the global economy has seen.
Long-term signals and short-term noise
Regardless of whether you invest in gold, other commodities or shares, it is important to learn to distinguish between short-term noise and long-term signals. Any event that affects the price of an asset in the short term but where the price soon returns to previous levels is noise and should only be used to rebalance a position you already have. Long-term signals, on the other hand, are what drive the price up or down in the long term.
The point of the examples above was to show that while major movements due to war or geopolitical unrest have often been short-term trend breakers, actions by central banks and concerns about the stability of the financial system have been what created long-term movements in real terms. In other words, gold is not a hedge against war, but merely a reflection of our trust in fiat currencies.
Maybe it 's different now
What potentially sets the conflict in Israel apart from previous geopolitical events and their effect on the price of gold is that what we are seeing now is potentially the start of a much larger global conflict. Biden and the US have said during the weekend of October 14-15 that they will support both Ukraine in the war with Russia, but that they will also continue to send financial support to Israel. A larger conflict and potential war where the US has greater involvement combined with an expected recession could mean further stimulus and thus a much higher price of gold.
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