War Chest: How Gold Performs in Times of ConflictPosted on — Leave a comment
Amid recent exchanges between Trump and North Korea, many Americans feel that they’re on uncertain ground. Moreover, the stability of that ground becomes more tenuous with each passing day as the rhetoric climbs. Escalating remarks are prompting investors to question assumptions about their long-term investments. Can history offer any clues to understanding how gold performs during war?
Though today’s threats of war involve the U.S. we can infer wartime price movements based on other international conflicts. Why? Because gold is an international currency and therefore responds to major upheavals across the globe.
A volatile period in the late 1970s brought many serious conflicts. In 1978, we saw the Iranian Revolution. Then, 1979 brought the Soviet Union’s invasion of Afghanistan and the Iran-Iraq war. During this same period gold rose 23% in 1977, then 37% in 1978. However, the real ascent came at the end of the 70s when gold shot up 123%.
Fast forward to 1990. Iraq invades Kuwait, the Gulf War starts and gold increases. Though as the conflict drew to a close gold returned to its pre-war levels. This pattern resurfaced shortly after the September 11th, 2001 terrorist attacks when gold increased again.
Interestingly, history shows that perceptions of war are as influential to gold prices as war itself. That is, when investors believe that a war will be short-lived gold responds with a downward movement despite lack of a peace agreement. This is intuitive as many people view gold as a safe haven asset which serves to preserve wealth in times of geopolitical conflict. For example some analysts have noted that as rumors of war grew amid U.S.-Iran tensions in November of 2007 gold surged to a then 27-year high.
Interestingly, gold can become a weapon, of sorts, during war. In 2012 Syria was forced to sell a portion of their 25.8-ton gold cache to buoy their efforts in the wake of heavy sanctions from Western and Arab nations. Occurrences like this are hardly isolated. Prolonged periods of war can hasten the evolution world finances as was the case when England and France dueled for nearly three decades spanning 1688 and 1756.
Chris Blackhurst, writing for The Independent explains “this led to the Financial Revolution, and the creation of The Bank of England in 1694.” The intention behind the bank was to raise desperately needed money for the government. In his review of Kwai Kwarteng’s book War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt, he explains “So began a curiously symbiotic relationship – of war and finance, both needing each other. Always, in uncertain times, there was gold itself to fall back upon. To the current period, and there are those who will maintain that our policy in the Middle East resembles those conquistadors.”
In uncertain times investors are wise to revisit their diversification plans. The road ahead is uncertain. Rather than attempt to predict outcomes it’s important to ensure that one’s portfolio is positioned for all eventualities.