Ukraine, Russia, gold and geopolitics

Juan Carlos Artigas
Global Head of Research World Gold Council

Posted

As the world’s attention has shifted to the crisis in Ukraine, we have received a lot of queries from investors about the effects of the recent events on gold’s performance in the short, medium and long term.

Taking a step back, we believe that geopolitical events in isolation are neither the only nor the main reason why investors should own gold. Gold’s role as a strategic asset is linked to its broad contribution to returns, diversification, liquidity and positive portfolio impact.

However, events like these represent a clear example of why gold is such an effective and well-established hedge against expected and unexpected market risks.

As Russian troops entered Ukraine on Thursday morning GMT, the gold price surged to an intra-day high of US$1,974/oz.1 And while it has given up most of Thursday’s gains as global equities rebounded, gold is still more than 5% higher month-to-date.2

Historical analysis suggests that gold has reacted positively to tail events linked to geopolitics and, despite price volatility, tended to keep those gains in the months following the initial event (Chart 1). In addition, gold trades in a deep and highly liquid market, with collective volumes surpassing US$120bn a day on average and tight bid-ask spreads. All these, combined with the fact that bullion carries no credit risk, makes gold a sought-after safe haven asset.

Chart 1: Average gold performance before and after various geopolitical events*

*The gold price is indexed at 100 at the start of the event, denoted by "D". Geopolitical events include: Start of Yom Kippur War (6 Oct 1973), Iranian Revolution: Commencement of Shah's Exile (16 Jan 1979), Iran-Iraq War (22 Sept 1980), Chernobyl nucelar disaster (26 Apr 1986), Iraqi invasion of Kuwait (2 Aug 1990), Operation Desert Storm (17 Jan 1991), World Trade Center bombing (26 Feb 1993), Oklahoma City bombing (19 Apr 1995), September 11 attacks (11 Sept 2001), US Iraq invasion (20 Mar 2003), Fukushima nuclear disaster (11 Mar 2011)
Source: Bloomberg, ICE Benchmark Administration, World Gold Council

Gold also significantly outperformed against the US dollar as well as US, European, and UK sovereign bonds over the past week (Chart 2). And gold’s tested performance role as a high-quality, liquid store of wealth stands in stark contrast to assets such as bitcoin, which performed in line with equities during the recent crisis – both as equities plummeted as well as when they rebounded towards the end of the day and in early morning trading on Friday, February 25th.

Chart 2: Recent performance of gold, bonds and other assets*

*Performance from 18 February to 24 February 2022. Performance in USD terms except for UK and Euro bonds that reflect local currency performance. Bond performance based on ICE BofA Bond Indices. Global equities based on MSCI World Equity Index. Bitcoin based on Blomberg's XBT composite. Gold based on LBMA Gold Price PM.
Source: Bloomberg, ICE BofA, ICE Becnhmark Administration, World Gold Council

Looking forward, we believe that gold may experience price volatility in either direction due to potential tactical positioning but investment demand is likely to be supported longer term by high inflation, geopolitics and overall market pullbacks, especially since – as we discussed in our Gold Outlook 2022 – many of the simmering tensions that took the back seat during the COVID pandemic are starting to resurface.

 

1Based on the gold spot price (XAU) highest recorded level intra-day on 24 February 2022.

2Based on the LBMA Gold Price AM as on Friday 25 February 2022, due to data availability