How do economic crises and wars impact the gold price

Gold is a celebrated haven asset that holds its value during economic crises and wars. Historically, when stock markets have crashed and currencies have fallen, gold has managed to retain its value. Typically, gold prices rise during periods of geopolitical tensions due to reasons like safe-haven buying, supply chain disruptions, and inflation hedging. This article outlines the impact of economic crises and wars on gold prices to help you understand the importance of yellow metal in investing.

• Historically, gold prices have surged during economic crises and geopolitical tensions.
• Investors prefer shifting to safe-haven gold assets to preserve their wealth in times of economic duress.
• Gold helps hedge against currency devaluation and inflationary pressures.

Historically, gold has remained a steady and reliable asset each time the stock market has tumbled due to economic distress, wars, and conflicts. Back in 2008, the US market crash sent the global markets into a free fall. While the market had to endure volatility for the next few years, gold prices witnessed a sharp rise during the same period. In fact, prices of gold increased from $700 per ounce in 2008 to $1,900 per ounce in 2011. Once the stock markets started stabilising post-2011, gold prices also started levelling out.

Similarly, during the COVID-19 pandemic, gold prices surged as investors sought to move to safe-haven assets amid global economic uncertainty. Lockdowns, supply chain disruptions, demand retrenchment, and monetary policies pushed gold prices to record highs of $1,902 per ounce in 2020.

Gold prices also rallied during the Russia-Ukraine conflict. The conflict started on 24th February 2022. On 7th March, gold prices in India rose by about Rs. 1,000/10 grams. Backed by concerns of economic slowdowns, prices of 24-carat gold soared to Rs. 53,890/10 grams. Additionally, the conflict caused severe strain on gold production since Russia is one of the top 3 gold producers in the world. Supply chain disruptions pushed gold prices higher.

In a nutshell, the impact of economic crises and war on gold prices is palpable in the economy. Gold prices tend to surge during an economic crisis and wars due to the following reasons:

Safe haven asset

The yellow metal benefits from economic setbacks and rises during wars because investors turn to safe-haven assets at times of uncertainty. For centuries, gold has played the role of a safe-haven asset for investors. A safe haven asset is an asset that’s likely to grow in value over time, even amidst market turbulence. When markets are volatile, investors park their corpus in gold to ensure a stable store of value, protect their wealth, and reduce volatility exposure from equity investments. This, in turn, results in gold price surges.

Hedge against inflation

Economic crises and geopolitical tensions often result in inflation and currency devaluation. Gold acts as a potent hedge against inflation. As a store of value, gold holds its worth over time, making it an attractive investment option when currencies are losing their purchasing power.
 

Supply disruptions

A rise in gold prices is a direct result of supply chain disruptions. Long-term conflicts can disrupt global supply chains due to stagnating mining, refining, and transportation operations. The scarce supply is unable to keep up with the investor demand for gold as a safe-haven asset. Since demand outpaces supply, gold prices start surging.
 

Currency depreciation

As mentioned earlier, economic crises weaken currencies. For instance, the 2008 market crash caused a ripple effect in the world, with most global currencies caught in a free fall. In other words, economic crises and war-like conflicts can result in severe instability. Since gold is priced in major global currencies like the US dollar, a weaker currency makes gold more expensive in relative terms. Simply put, this marks an increase in gold prices.

Investor uncertainty

In times of geopolitical tensions and economic downturns, the stock market is reeling into a downward spiral. Historically, the movement of gold prices and the stock market have been inversely proportional to each other. When the market declines, investors are uncertain about the performance of stocks and bonds. Gold has a negative correlation with these markets. Therefore, investors flock to purchase the yellow metal, which increases the price of gold in the global markets.

Recently, prices of the yellow metal increased in response to the Israel-Iran conflict. On 2nd October 2024, gold prices increased to a new high of Rs. 78,300 per 10 grams due to these escalating tensions in the Middle East as well as lower US bond yields. Prices rose by Rs. 1,500/10 gram compared to 1st October 2024. Experts suggest that prices of the yellow metal will keep rising further if these geopolitical tensions worsen. Goldman Sachs predicts a steady rise in gold prices in the near future, setting the gold price target at $2,700 by early 2025.

Different asset classes respond to market crises and conflicts differently. While stocks and bonds decline under economic duress, gold tends to surge. That’s why investors, businesses, and even governments prefer allocating a portion of their portfolios to gold as a hedge against impending market volatility. Ongoing conflicts can cause disruptions in long-term geopolitical equations, impact supply chains, and cause uncertainty in market-linked financial instruments. To minimise these risks, investors turn to gold. As a safe haven asset, gold preserves value even when markets are plunging, and currencies are losing purchasing power.

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