The gold price has been little affected by geopolitical unrest over the past 10 years. But after Hamas’ attack on Israel, gold is back. This is reflected in the significantly higher gold price, which rose by as much as 8% in the period between October 7 and 20 and has not moved since then.
It is interesting to draw a comparison with previous periods of geopolitical unrest. After the attacks on 9/11, the price of gold rose by as much as 6.5% within 5 days while the stock markets shot down. However, two months later the gold price had fallen by 5% again and the MSCI World Index recorded a plus of 4.5%.
In the first week of the Russian invasion of Ukraine in February 2022, the gold price barely budged with an increase of 1.3%, before shooting up by 8% in the following days. The MSCI World Index seemed unaffected by the attack and even rose by 2% 5 days after the attack. After two months, the gold price was 2% higher than before the invasion and the MSCI World Index was only slightly in the red.
These two examples show that context determines the gold price. Due to the growing popularity of gold ETFs, technical market analysis is more applicable today than it was a decade ago. Investing in metals has in any case gained ground due to the shortage of alternatives, now that the MSCI World Index has collapsed by 2% since October 6 and bonds cannot currently be classified as a top investment.
The graph above highlights the relevance of context by comparing the gold price since the 1980s with the inverse of the nominal yields on ten-year US government bonds. By this measure, gold is now approximately at the expected price. The problem with such measurements is that there is no obvious way to measure the value of gold. The precious metal does not generate any real income. However, the costs associated with holding gold can be offset by returns from other safe assets, such as US government bonds.
Possible recessions support gold prices
Past history also shows that gold fulfills its function as a hedge against inflation less well in times of secular inflation and nominal interest rate declines. For example, the real value of gold fell by more than 80% between 1980 and 2001. If interest rates remain high for longer than expected, it is important to take this into account when predicting the value of gold in the medium term.
Worldwide, the series of interest rate increases appears to be coming to an end and possible recessions are supporting the gold price. The fact that the central banks of China and India are replenishing their gold reserves is also driving up the price.”