About a year ago, the world faced another COVID variant and inflation that was no longer “transitory.”
Yet something bigger was about to occur, and there were already whispers of it.
A month and a half after New Year’s Day, on February 24, 2022, Russia did the unthinkable and shook up the world order. It invaded Ukraine and launched the largest invasion of a European country since WWII.
However, something fascinating happened beginning on December 15, 2021, over two months before the invasion.
The Price of Gold Began to Skyrocket.
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What happened on December 15, 2021?
Russian hybrid forces launched seven attacks in eastern Ukraine.
Additionally, The Washington Post released an Op-ed titled “To deter a Russian attack, Ukraine needs to prepare for guerrilla warfare.” At the same time, The UN Human Rights Council warned of threats to fundamental freedoms in Ukraine.
Between December 15, 2021, and roughly a week after the invasion on March 08, 2022, gold’s price increased by 18.14% from $1,753.90 an ounce to $2,072.00 an ounce. The gold bulls saw what was coming before everyone and reaped the rewards.
Could things worsen with war broadening to the rest of Europe? What about in Asia as Chinese and Russian ties warm and the fate of Taiwan lies in the balance?
Fast forward to the start of 2023, and gold's price is already up roughly 3% year-to-date and at a six-month high.
Does this mean geopolitics worsen from here? Are the gold bulls ahead of the game again?
Why Gold Tends to Rise With Global Tensions
Geopolitics contribute to gold's upside just as much as inflation and economic despair. Primarily, it's because of gold's properties as a tangible asset, a finite resource, and a store of value with a perpetual shelf life.
Nicknamed the “crisis commodity," physical gold will never go bankrupt. However, bonds can always default, and paper currencies can turn worthless.
Think of all that gold witnessed since 4000 B.C. when its first discoveries occurred in Eastern Europe- the collapse of empires, conquests, world wars, famines, and more.
Yet the yellow metal always maintained its value.
That's why governments and central banks increase their gold purchases annually, even when things aren’t deteriorating. No other asset can add protection to a safety net like gold can.
According to analysts cited by the Financial Times, Russia and China accumulated the most gold in 2022, and it makes sense why. Both have warming ties and face severe economic risks from global sanctions.
Russia’s central bank resumed gold purchases at historic heights following the Ukraine invasion. Despite what Russia says, its central bank’s actions show that they knew sanctions would have economic consequences.
China also added 32 tons of gold to its reserves in November 2022 while reducing its holdings of U.S. treasury bonds to a 12-year low. Perhaps it's to hedge against the fallout of sanctions from supporting Russia or in case it invades Taiwan.
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Gold’s Correlation With War
It’s not hard to see that rising gold prices correlate with worsening wars. You can see it decade after decade starting around the 1970s when President Nixon abandoned the gold standard.
Gold faced multiple geopolitical catalysts during the 1970s, such as the end of the Vietnam War, the Arab oil embargo, the Iranian Revolution, the Soviet invasion of Afghanistan, and the Iran-Iraq War.
The Gulf War and the War on Terror
When Sadaam Hussein invaded Kuwait, kicking off the Gulf War in 1990, gold prices soared over 20% from $345.85 an ounce on June 14, 1990, to $415.70 an ounce on August 23, 1990.
Of course, U.S. interests remained in that part of the world as tensions continued to simmer. In the decade following 9/11 and the war on terror, stocks fell 89% versus gold, while gold's price increased by over 560%.
North Korea and Iran
We were fortunate not to enter any new wars during the Trump administration. However, on several occasions, nasty rhetoric, minor skirmishes, and the simple fear of "what could happen" caused short-term spikes in gold prices.
Take the summer of 2017, for example, when President Trump and North Korean leader Kim Jong Un engaged in a war of words. Kim Jong Un called Trump a “dotard” while Trump insulted him as “a madman,” “wacko,” “maniac,” and “little rocketman.” Based on these insults and fears of war, gold moved 10.86% from $1,207.55 an ounce on July 10, 2017, to as high as $1,338.75 an ounce on September 11, 2017.
Harsh rhetoric and actions against Iran also caused gold prices to rise for a week after an attack on January 3, 2020, assassinated Iranian General Qassim Soleimani. Gold rose 4.1% from $1,520.55 an ounce on January 2, 2020, to $1,582.85 barely a week later on January 8, 2020. A classic case of “buy the rumor, sell the news” occurred as fears of a broader conflict permeated the market.
The Key Takeaway- War in 2023 Means Upside for Gold
There’s no telling where 2023 goes geopolitically. But if we go by gold’s price action, it’s not looking good. Gold saw preemptive moves before the Russia-Ukraine War started, and it’s very plausible that it’s doing the same thing now in anticipation of worsening and broadening geopolitics.
The likelihood of the Russia-Ukraine War turning into something broader and more severe in Europe continues rising. Weeks before missiles landed in NATO-allied Poland for the first time in November, U.S. Strategic Command head Admiral Charles Richard called the war in Ukraine a “warmup" for a bigger one.
Retired US Army Brig. Gen. Kevin Ryan also told Business Insider on January 10, 2023, that he believes Russia "would use a nuclear weapon before it allowed its military to be defeated in the field."
Yet it’s not just Europe that's a concern. Asia remains a powder keg ready to explode at any moment.
China, of course, is our biggest security threat and vowed to ‘smash plots for independence’ in Taiwan in a blunt new year’s threat. China continues holding large-scale military exercises simulating a blockade or invasion. At the end of 2022, it completed its largest-ever exercise, with 71 planes and seven ships sent toward Taiwan.
North Korea also has to be a concern as it conducted a record number of missile tests in 2022 and has nuclear ambitions that directly threaten South Korea, Japan, and the U.S. mainland.
There’s no telling whether we will see World War III in 2023. But early price action from gold tells us to buckle up and prepare for anything. Saxo Bank believes gold could reach $3K per ounce this year and Swiss Asia Capital thinks gold could reach $4K per ounce.
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