Geopolitical Conflicts and Precious Metals Price Fluctuations

What is the impact of geopolitical news on gold? How does gold react to escalations of geopolitical tensions, wars, and market uncertainty? And what is the role of typically considered haven investments such as gold in a financial portfolio? 

These questions are extremely relevant, amid ongoing tensions in the Middle East, the Ukraine war and the fragility of the banking system at large.

In this article, we will analyse the nexus between precious metals and geopolitical tension.

Geopolitics and Market Reactions

It is well known that gold and silver prices have a positive correlation with uncertainty in the markets and geopolitical tension. In market turmoil, investors focus on safe havens and precious metals play a key role in these moments. 

Indeed, gold – and silver – can protect investment portfolios, offering them stability and reducing volatility. Moreover, they could be one of the few assets able to appreciate when stocks, bonds, and other commodities (apart from oil) are most likely falling. At the same time, statistically, part of the gains are generally absorbed once a given scenario shaking the market, calms.

Key geopolitical conflicts and their impact

Let us have a look at a historical analysis of some major geopolitical events of the last few decades and price trends of gold. How has the gold price responded to market shocks?

Analysing the long-term chart of gold, we can point out the rally of bullion in 1979-80. The Iranian Revolution in 1979 indeed resulted in an energy crisis, with a substantial disruption in global oil supply and a subsequent surge in oil prices in the following months.

Within a short period, the gold spot price experienced a substantial increase, reaching approximately $800, although it gradually stabilised as the situation normalized. The price, however, did not return to the former level but remained in the $300-450 range.

Gold moved up also in 1990, with the Gulf War, even if the price increase was much softer. Gold saw a moderate percentage increase following the terrorist attack of September 11th, 2001, but the surge was relatively modest compared to other events.

The scenario was extremely different in the final part of that decade, when the subprime crisis (started in 2007), followed by a banking crisis, pushed the Federal Reserve to an extraordinary dovish monetary policy. Bullion rallied from around $630 (January 2007) to a new record level of $1,920 dollars an ounce (September 2011).

Gold initially witnessed a decline in March 2020 amid market turmoil caused by the onset of the coronavirus pandemic. However, it later regained its status as a safe-haven asset and experienced a notable rebound. The gold rally continued in the following months when the Federal Reserve and all other major central banks announced dovish monetary policy to support the economy, bringing the price for the first time above the $2,000 mark.

In February 2022, when Russia invaded Ukraine, gold reached a new record in the region of $2,070 dollars an ounce, before slowing down in the following months. In October 2023, following heightened tensions between Hamas and Israel, investors began to allocate more of their portfolio to gold, leading to a rebound in bullion prices from $1,950 to $2,000. Gold rebounded, expanding its rally from $1,950 to $2,000.

Strategies for navigating geopolitical uncertainty

When there are geopolitical tensions, the demand for safe-haven assets jumps. This has particular relevance in the short-term when investors are not yet able to evaluate the risk of the new threat and tensions rattle investors’ nerves. Overall, we can say that gold and silver are certainly part of any strategy for navigating geopolitical uncertainty.

Particularly, gold has the privilege of being a unique commodity, with a low correlation with all other assets. This could help investors to increase the resilience of their financial portfolio.

At the same time, precious metals should not be the only answer to markets’ turmoil. 

Investors should always diversify the financial assets present in their portfolio (stocks, bonds, commodities, etc). Moreover, if there are geopolitical tensions, it is crucial to diversify the areas of investment (investing in different economic regions and in different currencies, to minimize the consequences of tensions in specific countries).

Geopolitical Risk in a Globalised World

The current geopolitical scenario offers plenty of uncertainty. The conflict between Hamas and Israel is only the latest factor of a very complicated picture. Indeed, the war between Russia and Ukraine does not seem close to an end, while tensions between China and Taiwan could represent a global issue. Moreover, the trade dispute between the U.S. and China is still unsolved. The turmoil in Turkey has triggered, in the last few years, a crash in the local currency.

In a few words, geopolitical risk remains a central topic in a globalised world. The gold price is of course influenced by geopolitical news, even if drivers such as Federal Reserve monetary policy, bonds’ yields, and macroeconomic data (non-farm payrolls, unemployment rate, inflation data) have become more significant for understanding market direction.

The role of safe-haven investment

Allocating a percentage of the portfolio to gold is crucial. It could help investors as a hedge, in case of stock market crashes, but it could also be a haven investment in case of significant volatility in the forex markets (particularly in case the greenback is experiencing trouble).

The importance of holding gold in a portfolio appears even stronger if we look at central bank behaviour. Over the last decade, many institutions, including the central banks of China, Russia, India, Qatar and Turkey, increased the presence of gold in their reserves, sometimes as part of a “de-dollarisation” process.