Market participants often use the term ‘geopolitical’ to describe investment risks arising from conflicts between nations, both individual and collective, on a global scale. According to Oxford Languages, geopolitical refers to political matters, especially international relations, influenced by geographical factors.
The concern lies in the tendency to attribute recent fluctuations in the gold market to geopolitical events, especially considering gold as a safe-haven asset. For analysts and financial writers, it becomes a convenient explanation for the question, “Why did gold prices rise?” Short-term fluctuations, such as those prompted by events like the Hamas attack on Israel, might cause momentary spikes in gold prices. Still, the fundamental question remains: Are these price increases genuinely substantiated by geopolitical conflicts?
War and Speculations: Impact on Gold Prices
In recent history, events like Russia’s invasion of Ukraine triggered speculation about gold prices. Following such circumstances, there were immediate projections of soaring gold prices, often fueled by fears of escalated geopolitical risks. However, these projections rarely materialize into a lasting surge. For instance, despite initial optimism during the Gulf War in the early 1990s, gold prices eventually receded. Similar patterns emerged with other geopolitical events, such as the verbal conflicts between the United States and North Korea or the US invasion of Afghanistan.
Lessons from History: Gold and World Wars
Examining historical events like World War II offers valuable insights. Even during a global conflict of such magnitude, gold prices did not experience a sustained increase. The correlation between geopolitical events and gold prices appears weakened when contrasted against the backdrop of the long-term decline in the purchasing power of the US dollar.
The Dollar Factor: Key to Understanding Gold Prices
A deeper analysis reveals that the primary driver behind gold price fluctuations is the long-term erosion of the US dollar’s purchasing power. Geopolitical events, although sparking temporary market reactions, do not exert a significant and enduring influence on gold prices unless they negatively impact the US dollar. Thus, any rise in gold prices is fundamentally connected to the historical loss in US dollar purchasing power.
In summary, while geopolitical events may cause short-term fluctuations, the enduring trend in gold prices is intricately linked to the diminishing purchasing power of the US dollar, highlighting the pivotal role of currency dynamics in the gold market.