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How Does Geopolitics Affect The Price Of Gold? [Written by an expert]

Published by Tavex Analysts in category Market News on 19.10.2023
Gold price (XAU-GBP)
1,901.20 GBP/oz
  
+ GBP25.44
Silver price (XAG-GBP)
24.79 GBP/oz
  
+ GBP1.45
Geopolitical tensions

Gold is regarded as a safe haven asset, helping investors protect their assets during volatile times. In essence, it is insurance that allows you to keep your property’s long-term purchasing power. The escalation of geopolitical tensions raises uncertainty, and the price of gold often responds positively to this – as it did following the conflict between Israel and Hamas.

What is the relationship between geopolitical events and gold prices? What should investors think about?

The Palestinian resistance organisation Hamas launched unprecedented attacks against Israel in the first week of October, launching 5,000 rockets from Gaza into Israeli territory. Following that, the price of gold began to rise quickly, rising 1.6 percent the next trading day to $1,861. The rise continued in the days that followed, with the price of an ounce reaching $1,947 a week and a half after the attacks.

A significant increase occurred on October 13, when Israel strongly advised Gaza City residents to leave the area.The Israeli military is thought to be planning a ground invasion of the Gaza Strip, which would be preceded by heavy rocket attacks. On the same day, gold rose 3.5 percent in dollar terms. Gold experienced its biggest weekly price increase since March of this year last week.

There are concerns about the conflict escalating

It is critical to understand that investors are currently attempting to consider the risk of escalation of the conflict, which can be viewed as one of the primary reasons for the recent rapid rise. It is feared that the conflict will spread, and that Iran and the United States will respond militarily.

This, in turn, would mean even more uncertainty and serious consequences for markets such as the oil market. If the war escalates, it may begin to disrupt oil production (supply decreases), causing the price of oil and many other commodities to rise. From there, it would already have an impact on inflation in many countries, as well as their economies and monetary policies.

Let us recall the 1973 oil crisis, which was caused by an OPEC oil embargo in response to the US decision to support the Israeli army in the Yom Kippur War. This was one of the reasons why the United States was hit by several large waves of inflation in the 1970s, which also had a significant impact on the economy. Gold’s price increased several dozen times during the same decade.

Last week, the price of oil increased by 7.5 percent. Because there is no oil production in the conflict zone, the only factor driving up the price of oil is the fear that the conflict will spread to other Middle Eastern countries that are large oil producers. However, if additional risks do not materialise and Israel sticks to a more limited invasion of Gaza than expected, we may see a short-term drop in both oil and gold prices.

Geopolitics has an indirect long-term impact

In general, the impact of wars, conflicts, and other geopolitical events on the price of gold is usually only visible in the short term. We also saw this after the start of the war in Ukraine, with gold prices nearing new highs within weeks of the conflict’s start. When they became accustomed to the war and there was no major escalation, the price of gold fell as well.

At the same time, it is worth noting that the war in Ukraine is one of the factors that has contributed to the price of gold remaining high in the long run. The long-term relationship of gold prices with geopolitical events, on the other hand, is more difficult to identify and assess. Prices can quickly rise in just a few minutes after a geopolitical event, so movements over days and weeks are more relatable.

What exactly is geopolitics?

Geopolitics is the study of the impact of geography, economy, and demography on politics, particularly foreign policy. Geopolitical risk is the risk that a country’s policies or actions will have a significant impact on another country. This power can be political, social, or economic. Armed conflicts, civil wars, coups, trade wars, sanctions, and other geopolitical events are examples.

The September 11, 2001 attacks on the Twin Towers in New York are another good example. Gold rose nearly 6% in one day on the London market following the event, but fell back to pre-attack levels after the initial shock.

When it was revealed in 2016 that the British referendum had decided to leave the European Union, gold had a similar reaction. At the time, it was feared that several other countries would follow suit, having a significant impact on the region’s geopolitics and economy.

The price of gold increased by 8% in the hours following the announcement of the referendum results. However, gold then moved sideways before falling precipitously a few months later, falling even below its pre-Brexit vote level. Market participants realised that the impact on economies is likely to be less severe than anticipated, and that the European Union will not disintegrate anytime soon.

At the same time, it can be argued that the long-term wars in Afghanistan and Iraq that followed the 2001 attacks were one of the factors that aided gold’s rapid price rise in the decade before last. The wars were extremely expensive, forcing the United States to rapidly increase its national debt, resulting in a larger deficit in the national budget. However, it is thought that the rise in the budget deficit is already more closely related to the rise in gold prices.

The current conflict’s price impact is likely to be short-lived

In my opinion, the impact of geopolitical events on the price of gold is frequently overstated. There is a link, but it is usually only visible in short-term price movements. Real interest rates (inflation-adjusted interest rates), inflation, physical demand, and central bank monetary policy all have a much greater impact on the price of gold.It is true that geopolitical events can have a significant impact on the latter, as demonstrated by the Corona crisis.

As a result, it is critical to comprehend the long-term implications of a given geopolitical event. Will it, for example, force the government to increase spending significantly, central banks to print money, or have serious consequences for the economy and financial system? Could it lead to an increase in the price of vital raw materials (such as oil)?

It is obvious that the conflict between Israel and Hamas will have little impact on the global economy. However, if the conflict escalates and other countries become involved, there will be a direct impact. This could potentially support the price of gold in the long run (as we have seen with the Iraq and Afghanistan wars). So far, I believe the effect is only temporary.

Geopolitical events, while significant, frequently have a short-term impact on gold prices. While price fluctuations can occur in the immediate aftermath of significant events, other factors such as real interest rates, inflation, physical demand, and central bank policies play a larger role in determining gold’s long-term value. Understanding the broader implications of a geopolitical event is critical because its long-term effects on the economy, government spending, and monetary policy can influence gold prices indirectly. The recent conflict between Israel and Hamas serves as a reminder of the gold market’s complexities and susceptibility to global events, but it’s important to remember that such effects may be transient.

Conclusion

In conclusion, while geopolitical events undeniably affect gold prices in the short term, the long-term implications are shaped by a myriad of factors – from economic growth in developing countries and events in the Middle East to the actions of financial institutions and fluctuations in exchange rates. To truly grasp gold’s price trajectory, one must consider its position within the vast web of global economic activity, where every thread, be it a major conflict or a shift in government policy, plays its part.

Gold price (XAU-GBP)
1,901.20 GBP/oz
  
+ GBP25.44
Silver price (XAG-GBP)
24.79 GBP/oz
  
+ GBP1.45

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