When it comes to the economics of spot metal prices, most factors that play a role are continuously present in some way. Supply and demand for precious metals, for instance, exist in all market conditions, even though the ratio of one to the other can vary considerably.
In some cases, however, more transient and temporary phenomena can impact the spot prices of metals like gold, silver, copper, platinum, and palladium. Geopolitical unrest is one such factor.
Here’s what investors need to know about how the tensions between countries, as well as internal conflict within a nation, can drive global spot metal prices up or down.
The Economics of Conflict
When two or more countries are at odds with one another, a number of different things can happen. At the extreme end of the spectrum is a war between those countries, which has extremely broad economic ramifications. Wars apply many different pressures on national economies and can continue to affect the economies involved long after the conflict has ended.
Wars often necessitate an increase in industrial production, which can actually be beneficial once the war is over. This is what happened in the United States during the Postwar Economy and the Golden Age of Capitalism (1945-1960) after the end of World War II.
On the flip side, the human casualties resulting from devastating wars can deplete a country’s effective labor force, making jobs created after the war difficult to fill. Due to the sheer expense involved in waging modern wars, a considerable expansion of national debt usually accompanies any kind of major combat operation as well.
In the past few decades, the more common approach to geopolitical conflict has been to institute economic sanctions. Though far less devastating and costly in human life as warfare, sanctions can still roil markets outside of the ones they’re imposed on. This is especially true if the country being sanctioned is a major exporter of commodities such as oil, copper, or even agricultural exports. By potentially closing off these exports from the global market, sanctions can drive the price of goods up by decreasing supply.
Most scenarios involving geopolitical unrest have an effect on the global markets and, by extension, on the spot prices of precious metals. Since gold is viewed as a de facto safe store of value during turbulent times, the yellow metal is usually most impacted, though other precious metals can and often do follow suit. The degree to which this effect takes place, as well as the timeline over which it spans, can vary considerably based on the event.
Wars tend to drive up the price of gold considerably. In part, this is a natural reaction to the increased national spending and lower consumer confidence that often accompany a major conflict. However, the effect of wars on gold usually exists on a fairly long timeline since investors must take into account the inflation that can occur after the war has concluded due to a tighter labor market. Because wars tend to deplete a country’s economic resources, they also have the capacity to weaken its currency—thus driving up the demand for safe-haven investments like precious metals.
Economic sanctions are less straightforward than wars, owing to the fact that markets often gradually shift to absorb their effects. If a country that’s a major exporter of oil is sanctioned by several major economies, for instance, the price of oil will rise to account for the fact that that country will no longer be able to sell to those markets. Other countries, however, will usually increase their production in order to meet the unsatisfied demand, thus balancing prices back out over the long-term.
The key component in determining the effects of economic sanctions is considering the size of the economy against which sanctions are being leveled. A good example of this is North Korea—a country that has faced many sanctions over the last several decades. Since North Korea is a fairly small economy that exports very little, these sanctions tend to have a negligible impact on worldwide prices.
Sweeping sanctions against larger economies, however, can cause substantial price increases over the short to medium term. This price inflation, in turn, usually results in moderate increases in the value of gold, silver, and other precious metals.
Lastly, it’s worth noting that once the market re-adjusts or the sanctions are lifted, spot prices usually level out more quickly than they would after the end of a war.
Factoring Geopolitical Unrest Into Your Investment Decisions
Knowing when to buy precious metals to guard against the results of geopolitical unrest is a challenging skill to learn. The key is to analyze whether the given geopolitical event will result in long-term tensions or merely a brief panic. Wars fall heavily into the former category, as they can last for years and continue to impact national economies well after they end; whereas economic sanctions are less certain, as they can last for years or be repealed in a matter of weeks with diplomatic negotiations.
Many news headlines that shock a nation, however, often have little ability to make any major, long-term changes to the global markets. Terrorist attacks or bombings, for example, can cause substantial upsets and cause the prices of both stocks and precious metals to become quite volatile for short periods of time. In most cases, though, these periods of volatility are very short-lived and cause little to no significant price changes in the long term.
It’s important to learn how to recognize when panic buying or selling of precious metals is occurring and not to buy until prices stabilize or a more discernible price trend emerges. If you buy or sell in the midst of a short panic, there’s a good chance that your investment will lose value shortly afterward when the panic ends.
The Effects of Increasing Stability
Just as unrest typically drives up the price of gold and other precious metals, the resolution of tensions between nations is often a cue for prices to slightly drop. This is especially true in the resolution of economic sanctions, when it may behoove investors to liquidate their capital from precious metals and move it into stocks or bonds.
When wars or punitive economic policies are averted by negotiation before they actually take place, the same kind of selling can also occur.
Be sure to check out the other articles in this series to read about more key factors that impact precious metals prices: