What does the Ukrainian crisis really mean for gold?

Gold: the go-to asset in wartime?

All you need to know about the Ukrainian crisis can be summed up in these three words: “own gold bullion”, said a newsletter I follow at the weekend.

On Monday, it looked like he was right. Gold rose a solid $20 or more, as stock markets slid.

But yesterday, those same stock markets rebounded and gold gave back at least half its gains.

The received wisdom is that you should own gold during times of international conflict.

Today, I want to examine just how true that is…

How does gold behave during conflict?

Before I get on to the main topic, I should say that I like the look of gold’s action at present – and that of the gold miners. The prices of both are steadily creeping up, then consolidating, rather than selling off viciously. Volumes are good. Institutional interest seems to be picking up.

I’m just not trumpeting the fact because I don’t want to put the curse on it.

However, today I want to look at how gold behaves during periods of international conflict. I’m going to look at some of the larger conflicts of the last 40 years or so and consider gold’s action during those periods.

At the sound of gunfire, there’s no doubt about it – the gold price tends to spike. We saw that on Monday, and it’s happened in the past. But what happens next?

In our first chart below, we see that, as news broke that chemical weapons were being used in Syria and the international community threatened to intervene, gold moved higher.

However, gold then started to slide back. Then, as a diplomatic solution was proposed, gold continued to sell off – ending lower than where it began.

Gold price during the Syrian civil war

Source: StockCharts.com

Next we look at the 34-day Israel-Hezbollah conflict in Lebanon, which began on 12 July 2006. Again, there is a spike up as the first guns are fired, then a drift lower. Once the conflict is ended, gold falls until an eventual low is reached.

Gold price during the 2006 Israel-Hezbollah conflict in Lebanon

Source: StockCharts.com


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Gold’s behaviour in wartime is surprisingly consistent

The next four charts come courtesy of Ross Clark and Bob Hoye over at Institutional Advisors. Clockwise from top left, we see the second Gulf War, the 1980 Iran-Iraq conflict, the Falklands War, and 9/11.

Gold price during the second Gulf War, the 1980 Iran-Iraq conflict, the Falklands War, and 9/11

As you can see from the charts, there’s quite a clear pattern here. In the case of the second Gulf War, in 2003 US Secretary of State Colin Powell made his presentation to the UN. That marked a peak for gold. When the war began on 19 March, gold actually sold off. The low would come a few days after the fall of Baghdad.

Similarly, the outbreak of the Iran-Iraq war in 1980 also marked a high in gold. It would then drift lower throughout.

The Falklands conflict of 1982 was the same. A short spike, followed by declines as the war unfolded, before an eventual low shortly after the end of the war.

As for 9/11, gold saw a huge spike on the day of the attack and a continued rally, but it fell once the US and Britain began bombing Al Qaeda camps in Afghanistan.

I have one final chart to show you, that of the first Gulf War in 1990.

Saddam’s invasion of Kuwait on 2 August 1990 saw a huge spike in gold. By late August the price was starting to fall. By mid-October the price was lower than it was before the invasion began.

The deadline for Saddam to withdraw his troops from Kuwait was 15 January 1991. As the date grew nearer and nearer, the gold price rose. The deadline passed. Saddam did not withdraw his troops, the coalition forces began their bombing and gold made its high. Then, for the next six months, it fell.

Gold price in the first Gulf War in 1990

Source: Institutional Advisors

Why gold could have topped out for now

There is a fairly clear pattern here. The gold price rises at the prospect of a conflict – or rather, at the fear of it. But once the conflict gets going, it sells off.

Perhaps it’s because fear subsides as people start to realise the war does not really affect them – I don’t know.  Perhaps it’s the uncertainty – once people can see the scale of the conflict, they calm down and carry on – and sell gold.

Of course, owning bullion during a conflict has saved many a situation, if not lives – assuming the conflict actually involves you in some way. But if it doesn’t, then over the short term, the above suggests that in fact gold is not the go-to asset.

So how should we apply these findings to today’s problems in Ukraine?

On Monday, the news was that Russia had invaded Ukraine. Politicians and diplomats, not to mention journalists, were all in a frenzy. Gold spiked to $1,355 an ounce (its one-year moving average by the way).

On Tuesday, Putin made some mollifying remarks and it turns out those troops that had ‘invaded’ were already there. Gold sold off.

I don’t know what’s going to happen next in Ukraine. I have absolutely no idea. I suspect that more lives will be lost, and that will be terrible. But I do not think that this will erupt into the kind of conflict that some were suggesting it would on Monday. And nor is this ‘Lehman part 2’.

So my guess – and it’s nothing more than that – is that gold might have just put in an intermediate top. It has just run into its one-year moving average (which is falling). It has also had a stellar last two months, while March and April are typically weak.

I get the feeling we’ll see a slide back to the $1,300 or $1,275 area – which would be healthy.

Finally I have begun work on a new book, Bitcoin – the Future of Money. If you’d like to get your name in the back and help fund it, just click here.

• Life After The State by Dominic Frisby is available at Amazon. An audiobook version is available here.

• Follow @dominicfrisby on Twitter.

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2 Responses

  1. 05/03/2014, kenthom2 wrote

    I agree wholeheartedly with your logic Dominic but you forget the key players in gold price are the hedge funds and they will be aggressively selling to hit the stop losses. Gold price will rise but the bull traps are already set!

  2. 19/03/2014, Howie Gibbons wrote

    I’m not so certain that the response from the hedgies will do much more than make the allure of holding physical metal even greater. It seems to me, in my very humble opinion, that every time they hit the stop loss button it just slows what I predict will be an inexorable rise in the value of this primitive relic.

    Most savvy people that I speak with are certain that the mark to fantasy asset values that are all over every balance sheet will tip the banks into another huge crisis, and then it looks like its game over for a lot of people’s savings once again

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