War and Gold and Silver Prices
Rattle. Rattle. That is the sound of sabres being well and truly shaken in Washington and Pyongyang in recent weeks. The rhetoric from both sides has certainly escalated to where the odds of war with North Korea have certainly risen lately. So if a war began, how might this affect the gold and silver price?
That is exactly the question we got from Craig this week:
“Will the onset of a war change the price of gold & silver? Up or Down?”
We certainly hope a war doesn’t eventuate, but it’s worth looking at the impact if war did eventuate.
The price of both metals have risen quite sharply in the past week. Some commentary we’ve read has alluded to the heightened tensions with 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 in June. When gold and silver are oversold like they had been, sharp rises in their respective prices are not unexpected. This is what has been happening since early July anyway.
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, perhaps the best way to consider how yet another war might affect the gold and silver price, is to look at what has happened in the past.
We were about to create a chart and plot a number for wars on it and see the results. But no sense recreating the wheel. Given this has already been done, let’s just borrow what others have already done.
This chart from Market Realist looks at a number of past international skirmishes and also some from this decade:
[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?]
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.
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 actual 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.
So the evidence seems to say that war does not appear to have a lasting impact on the price of gold and silver bullion. But, we think there is still a chance that a major war might have a noticeable impact on bullion prices.
In the earlier example of the wars in the later half of the 1970’s, we noted that the price for gold and silver were already rising and in a bull market before these wars occurred.
But Could Another 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. Why?
Because the end of the gold exchange standard allowed the USA to continue spending massively on “guns and butter” (war and social programs). It no longer had to send its gold reserves to foreign creditors as the USA 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.
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 length and severity of a war is the key factor affecting gold and silver prices.
What Might We Expect if a War With North Korea Occurred?
Any short skirmish between the USA and North Korea would likely go the way of many of these other shorter term wars. Being that the gold and silver prices would rise in the lead up to the actual fighting, then correct back down after the actual war with North Korea was announced.
It would probably take a long lasting battle of many years to have a lasting impact on precious metals prices. We certainly hope that doesn’t eventuate.
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 it’s debt and monetary base.
But 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.