How might a war between Russia and Ukraine affect the gold and silver price? See what can be learnt from past wars and how they impacted precious metals prices…
Table of Contents
- War and Gold and Silver Prices
- Does War Cause Gold and Silver to Rise?
- But Could A Previous War Have Caused the Gold Price to Rise in the 1970’s?
- What Might We Expect if a War With Russia Occurred?
- War on Terror and Gold Prices
Estimated reading time: 11 minutes
War and Gold and Silver Prices
Tension between Russia and Ukraine have continued to build over the past week.
At the moment there is an information war between Russia and the west. With both sides accusing each other of various things and not that much evidence to back it up. But tensions continue to boil and the USA mainstream media has been trotting out various “experts” to justify a strong position, while also trying to avoid actually engaging:
“The US and Nato have been adamant that their troops will not enter Ukraine no matter what happens, and the Pentagon has pulled out the 160 national guard soldiers who were acting as military advisers.
…However, the massing of Russian troops in Belarus and the deployment of a substantial Russian naval force in the Black Sea, matched on a smaller scale by Nato land, sea and air reinforcements on the alliance’s eastern flank, means there is much far more military hardware in close proximity than is normal. And with proximity comes the increased danger of accidents and unintended consequences.”Source.
Reports over the weekend seems to have boosted the gold price since last week.
“Russia could invade Ukraine at any time and might create a surprise pretext for an attack, the US national security adviser warned on Sunday, reaffirming a pledge to defend “every inch” of NATO territory.
Russia has more than 100,000 troops massed near Ukraine, which is not part of the Atlantic military alliance, and Washington – while keeping open the diplomatic channels that have so far failed to ease the crisis – has repeatedly said an invasion is imminent.”Source.
However the gold price has been building since October. Plus a record high inflation report also was released in the USA about the same time. So how much impact is the threat of way likely to have on the price of gold?
Troubles with Iran in 2020 Also Sent Gold Higher
Back in January 2020, then US President Donald Trump ordered the killing of Iranian General Qassim Soleimani. President Trump argued that the assassination was “to stop a war, we did not take action to start a war.”
Trump said: “He was plotting imminent and sinister attacks on American diplomats and personnel but we caught him in the act and terminated him.”
Iran then said they would retaliate for the death of the general.
There was plenty of rhetoric from both sides, and so the odds of conflict or even war with Iran did certainly rise. But in the end tensions dropped and nothing more serious happened.
Tensions With North Korea Also Boosted the Gold Price
Looking further back, in August 2017, we also saw the price of precious metals rise quite sharply. At the time some commentators alluded to the heightened tensions with North Korea as the reason for this rise. As Bloomberg reported:
President Donald Trump ratcheted up his rhetoric against North Korea to an unprecedented level Tuesday, warning Kim Jong Un’s regime will face a devastating military strike if it continues threatening the U.S. “North Korea best not make any more threats to the United States,” Trump told reporters in Bedminster, New Jersey. “They will be met with fire, fury and, frankly, power the likes of which this world has never seen before.”
Gold and silver did rise the same day. However both metals had fallen sharply prior to this period of tension. And when gold and silver are oversold, as they had been prior to August 2017, sharp rises in their respective prices are not unexpected.
We’d say the prevailing wisdom is that the gold price rises with war, due to a flight to safety. But is this actually the case?
Does War Cause Gold and Silver to Rise?
Rather than simply prognosticating about what might happen were a war with Russia to start, perhaps we should look at what has happened in the past. That is probably the most effective way to consider how yet another war might affect the gold and silver price.
We were about to create a gold chart and plot a number of historical wars on it and compare the results. But there’s no sense in recreating the wheel. Given this has already been done, we can borrow others research.
This chart from Market Realist looks at a number of past international skirmishes including the early 2000’s:
Upheavals during the 1970s
The late 1970s saw many upheavals, including the Iranian Revolution in 1978, the Iran-Iraq war in 1979, the Soviet Union’s invasion of Afghanistan in December 1979, and the Iranian hostage crisis in 1979. As you can see from the graph above, this period saw heightened activity in gold prices. Gold prices rose 23% in 1977, 37% in 1978, and an incredible 126% in 1979.
[GSG Editors Note: Of course the gold price did rise significantly in the later half of the 1970’s. So did these wars cause the price to rise or did they merely happen during a bull market in gold?]
During the first Gulf War, when Iraq invaded Kuwait in 1990, gold prices soared again. But soon after, gold returned to pre-war levels as talks of war continued. However, soon after the war was over, gold prices continued to soften, and by the end of 1991, they had reached almost the level they were at pre-invasion. After that, gold continued its downward trend as disinflation took hold.
After September 11, 2001, attack on the United States, gold prices surged. This move was followed by the US invasion of Iraq in 2003. This also resulted in an uptrend in gold prices. However, after a degree of confidence built up that the war would be short and successful, gold reverted to its pre-war value.
Even in 2014, when rumors started that the United States could intervene in Syria, gold prices reacted strongly.
So this points to gold rising in the lead up or upon rumours of war. But then correcting back to similar levels it was at pre-war, after the war actually begins.
Perhaps not surprising really.
As many markets follow the “buy the rumour, sell the fact” theory. Meaning once the official news actually arrives, the market has already “priced in” the event.
Some other research by Jan Skoyles backs up this theory further:
Talk of war and the act of war clearly affects the gold price. The price of the yellow metal obviously continued to climb after each of the three examples we provide. But in truth very little happens when the talk of war turns into action.
This brief look at a small selection of wars suggests that the gold price peaks prior to and at the beginning of military action, before returning to levels seen not long before. It then, of course goes on to extend its bull run. But how much of it was to do with wars that happen in the Middle East?
We believe very little, whilst geopolitical instability clearly is a driver for the gold price, it does not obviously have a long-term impact on the price of bullion. It may be interesting however to look at how the economic impact of wars go on to affect the price.
For instance, what many appear to forget when they discuss Syria, tapering and gold in the same breath, is that a war means money printing will have to happen regardless of what you call it.Source: therealasset.co.uk
So the evidence seems to say that war does not appear to have a lasting impact on the price of gold and silver bullion.
However, we think there is still a chance that a major war might have a noticeable impact on bullion prices.
Take the earlier mentioned example of the wars in the later half of the 1970’s. We noted that the prices of gold and silver were already rising and in a bull market before these wars occurred.
But Could A Previous War Have Caused the Gold Price to Rise in the 1970’s?
The Vietnam War ran from 1959 to 1975.
The spending required to fund this war is often cited as one of the key reasons for Nixon severing the last link of the US dollar to gold in 1971.
Because the end of the gold exchange standard allowed the USA to continue spending massively on “guns and butter” (war and social programs). The USA no longer had to send its gold reserves to foreign creditors as it had done to fund its spending throughout the 1960’s.
Thus, this increase in money creation up until 1975 likely caused the large rise of the gold price in the late 1970’s.
Most Likely it is the Length and Severity of a War that Affects the Gold Price
So rather than saying war causes the gold price to rise, perhaps we can say the increase in spending, government debt and money creation during times of major war, eventually causes the gold (and silver) price to rise.
Therefore it may be that the key factor affecting gold and silver prices is the length and severity of a war.
What Might We Expect if a War With Russia Occurred?
Any short skirmish between Russia and Ukraine would likely go the way of many of these other shorter term wars.
That being gold and silver prices would rise in the lead up to the actual fighting, then correct back down after the actual war with Russia was announced.
It would probably take a long lasting battle of many years between Russia and western nations to have a lasting impact on precious metals prices. We certainly hope that doesn’t eventuate.
The odds likely are against it too. It would seem USA and Russia may continue to talk strongly but avoid any actual engagement that might involve a full scale war. But of course, there are no guarantees.
War on Terror and Gold Prices
However the spending on the “war on terror” the US has been aimlessly waging since 2001 likely has already had an impact on gold prices. As it has added to the need for the USA to expand its debt and monetary base.
But our bet is that the ongoing breakdown of the global monetary system is likely to be the main reason for the rising gold price since 2001. It will likely be the main reason for a continuing rise in precious metals prices too.
Editors Note: This post was first published on 14 August 2017. Last updated 14 February 2022 to include new details about a potential war with Russia.