Last week gold surpassed $2,000 an ounce after the U.S. said it might ban Russian oil exports in retaliation for President Vladimir Putin’s invasion of Ukraine, raising concern about higher inflation and slowing economic growth in the States. And then gold hit an all-time high of $2,075/oz, as the London Bullion Market Association suspended its accreditation of six Russian precious metals refiners, meaning they will no longer be able to sell gold and silver in the London market.
Let’s distil why the price of gold rises when the threat of conflict looms? What is the correlation between the yellow metal and war that consistently allows the price per ounce to rise to record highs?
In recent history, we have seen this trend repeatedly play out. The late 70s illustrate this point very well. Think back to The Iranian Revolution in 1978, the Iran-Iraq war in 1979, the Soviet Union’s invasion of Afghanistan in December 1979, and the Iranian hostage crisis in 1979. The gold price reacted to all of these events; gold prices rose by 23% in 1977, 37% in 1978, and an incredible 126% in 1979.
In more recent events, as the situation in Syria began to escalate and the United States and its allies prepared for an offensive, gold began a sharp rise, with the price increasing by over $250 an ounce between June and August of 2013. The Syrian conflict was understood to bring a new wave of political instability to the Middle East, and there was speculation that as fighting raged between the Syrian government and the US-backed rebels, radical Islamist groups, such as ISIS, would use the chaos to gain a foothold in the eastern Mediterranean.
Fast-forward to Russia’s invasion of Ukraine, we see a similar trend, with gold reaching a 15 month high. The price of oil also rose substantially, as did palladium. These increased based on a threat to the global supply. The Black Sea region is said to handle over 2.5 million barrels of oil a day, and Russia accounts for 40% of the palladium mined globally. Neither Ukraine nor Russia is a major gold producer, and Russia is only ranked 5th in Global Gold Reserves rankings, with over 2 229 tonnes which aren’t nearly enough to threaten the gold trade.
So why are the gold bulls running, and what does this mean for your clients?
Unfortunately, the answer is far less exciting than the latest Hollywood action movie or a treasure chest full of gold doubloons being captured by the Royal Navy from rogue pirates. Instead, it simply boils down to instability.
Like any modern market, sentiment is a considerable portion of what drives the gold price. In the heavily globalised world we live in, there is an understanding of how an event on one side of the planet can affect an unrelated market on the other side. The idea of geopolitical instability drives the gold price higher, and talk of war is among the biggest instigators of instability. A regional conflict or proxy war may be confined to a geographical area, but these have a ripple effect on global markets. Gold acts as a natural currency hedge against looming uncertainty.
Precious metals like gold and silver are more resistant because they derive their value differently than fiat currency and other commodities. Precious metals are naturally occurring resources with a finite amount. In economic terms, this means they hold their intrinsic value and have a ‘market cap’. Although the price of gold can be volatile in the short term, it has always maintained its value in the longer run.
A regional conflict or proxy war may be confined to a geographical area, but these have a ripple effect on global markets. Gold acts as a natural currency hedge against looming uncertainty.
The tried-and-tested insurance characteristics of gold coins like the Krugerrand make for a sensible portfolio diversifier. Moreover, gold’s resilience is well documented. Throughout history, few assets have rivalled gold in popularity as a shield against almost any kind of trouble, from inflation to economic upheaval or currency fluctuations, to war. Our philosophy is that gold coins are for holding. Gold coins are about wealth preservation and generational wealth creation. In the long term, gold holds its value against inflation. But it may or may not be a good hedge in any shorter period.
With the menacing situation in Europe, do you have jittery clients? What solutions can you put forward to settle those skittish nerves? Have you considered physical bullion and gold coins?
Gold has a six thousand year track record as a safe store of value and is the only money that carries no counterparty risk. Gold offers savers a safe haven that protects wealth, especially during volatility and economic uncertainty. Buyers of physical precious metals are motivated by the fact that gold and silver offer a secure store of value, are a currency hedge, combat inflationary concerns and are moveable.
For most of our existing clients, wealth preservation is a focus. With inflation on an upward surge and problematic politics, we are seeing massive interest in gold bullion, silver and numismatics. Nothing beats the tangible security of holding genuine gold coins in your hand. Our clients find that very comforting and appreciate that gold provides prosperity safeguarding.
Speak to me to learn more about SAGCE & The Scoin Shop, our products and services. Then, let’s work together to make sense of this insecure moment in history and debate ideas to preserve wealth.