Gold, the traditional hedge against inflation and geopolitical risks has risen after Russia invaded its neighbours, Ukraine.
Nitesh Shah, head of commodities & macroeconomic research at WisdomTree, explores how the price of the yellow metal has changed following other geopolitical shocks of the last 50 years.
“This tragic event is moving gold, a metal that has been sitting in the shadows while other commodities have been rallying in the past year,” said Shah.
He said that geopolitical risk is inherently a difficult thing to quantify and determining the relationship between an asset price and those risks is even more difficult.
“Looking back, periods in which there has been a perception of elevated geopolitical events, it has been hard to say that asset prices have behaved in a consistent manner and any positive or negative price movement needs to be viewed in the context of broader economic activity at the time,” he said.
“Nevertheless, we can point to some geopolitical case studies where we have seen a very strong positive reaction from gold. The table gives four examples where gold has significantly outperformed equities in the aftermath of a geopolitical shock.”
Gold performance in the aftermath of geopolitical shocks
Notwithstanding the difficulty in quantifying geopolitical risk, Shah used a Geopolitical Risk Index developed by Dario Caldara and Matteo Iacoviello at the Federal Reserve Board based on automated text-search results of the electronic archives of 10 newspapers.
“Plotting their series against gold yields some interesting results,” he added.
Immediately before the build-up to the Gulf War, gold prices were quite depressed. The build-up to the war seemed to have ignited gold prices.
Similarly, before the 9/11 terrorist attacks in the US, gold was depressed. The attacks seemed to impact gold prices. The Iraqi war soon after kept gold well supported.
“We believe most people would agree that gold’s price behaviour in 2021 was disappointing, with the backdrop of an elevated level of inflation.
“Our models indicate that gold should have been trading close to $2500/oz in January 2022 when inflation in the US was running at 7.5%”
Could the war in Ukraine act as a catalyst for gold in a similar way to the noted events in 1990 and 2001?
On the day of the invasion, 24 February, gold had risen 3.3% and reached an intraday high of $1973/oz, the highest since August 2020.
As of 4 March, the price has fallen slightly to $1945/oz.
