If you hang around precious metals traders for any length of time, you are likely to hear a reference to gold as a “safe-haven asset.” When the existing economic or geopolitical status of the surrounding world declines, both experienced investors and novices have a tendency to stash as much of their wealth in the yellow metal as they possibly can.

This page is your guide to why that’s the case. Though it may seem obvious to some, there are several critical reasons that gold’s price tends to escalate during times of tension and conflict on the world stage.

In fact, there are several notable price changes in history that are strongly correlated to major world events that occurred shortly beforehand. So, let’s get a better grip on what the price of gold tends to do in the face of unrest, regardless of the form that the unrest takes.

What is a Safe-Haven Asset?

Safe-haven assets are investments that typically remain stable in value or increase in value during times of instability. Instability can take many different forms – economic, geopolitical, or logistical – but the important element of it is that it causes investors to fear a decrease in the value of their current investments.

Gold is likely the best-known safe-haven asset worldwide for several reasons. For one thing, it is a universally recognized commodity. Many countries hold gold as a store of value, so localized turmoil that might affect fiat currency often has less direct impact on gold’s value. Furthermore, it has enjoyed this universal acknowledgment of value for thousands of years.

Because it is so widely recognized, gold is also an extremely liquid asset and can be readily bought and sold. In fact, the low frequency at which gold is used in trade these days is a modern invention, as gold typically served as both the literal and figurative backstop for many different currencies in history.

Finally, gold is a safe-haven asset because it is tangible and portable. In other words, you can (in theory) stuff large amounts of gold in your pockets and walk away, secure in the knowledge that you won’t have to worry about finding a buyer to accept your “currency.”

Types of Events that Drive Gold Investment

Although people buy gold for a variety of reasons, there are certain major events that typically cause many to seek out more gold than they usually might. There are many different types of these situations, but here are some of the most prominent.

Economic Downturns and Worries

The best-known driver of gold investment is a downturn in the economy. The absolute effects of a slowing economy make some traditional investments less tenable, and investors are more apt to pull their wealth out of the stock market or other traditional investment classes in the pursuit of gold’s stability.

However, the effect of an economic downturn and the resulting rush to gold may be magnified according to the emotional impulse it engenders. In a way, economic recessions and depressions are self-fulfilling prophecies because consumers change their patterns in response to economic downturns in ways that reinforce and deepen the downward trajectory of the economy.

One of gold’s strongest correlations is its historical tendency to move differently from the status of the economy. If the economy is up, gold purchasing is usually down, but if the economy is down, the gold price has a tendency to increase.

Currency Instability and Inflation Concerns

Another situation that can cause an increase in gold investment can be part of the cause of the aforementioned economic troubles or a symptom of them: currency instability. One of the most fascinating elements of modern life is how fundamentally subjective the value of fiat currency is.

Governments and central banks can materially weaken their own currencies simply by printing more of it and releasing it into the public. In many cases, the governments are attempting to inject value into their economic systems, but the actual effect is to make each individual piece of the money supply less valuable.

In doing so, the value of investment portfolios necessarily declines, and most investors take a dim view of a declining portfolio. So, they turn to gold in order to hedge against inflation and the devaluation of the currency. Because gold is both tangible and universally recognized as valuable, it often stands outside of currency systems in terms of its ability to capture and hold net worths.

Wars and Unrest

One common reason that governments inflate their currencies is to pay for wars. However, wars alone can cause people to seek out the safe harbor offered by gold.

For one thing, war can cause entire economies to slow dramatically or come to a halt. If a large portion of the populace is fighting or involved in the war effort, the overall engine of the economy may not be able to keep spinning the same way.

For another thing, wars and civil unrest are just scary. If it seems as though a government regime or organization might be on the brink of collapse, gold will begin to seem like a better option – because a governmental downfall means the end of its currency, too.

Finally, wars can be disruptive on other commodities upon which the world relies. Any kind of attacks on oil reserves or other strategic assets can boost the need to buy gold in the minds of many investors.

Other Geopolitical Situations

There are several other international incidents that can lead to a rush on gold. Any type of disruptions that affect daily life negatively has the potential to generate nervousness from investors about the long-term viability of their traditional assets.

So, events like trade disputes, increases in tariffs, sanctions, or a worldwide pandemic can send investors to gold in a rush. We’ll discuss some historical examples of these kinds of things happening.

Historical Examples of Gold During Geopolitical Conflicts

The Gulf War (1990–1991)

In August 1990, Iraqi President Saddam Hussein used his army to cross the border and invade its neighbor, Kuwait. Hussein wished to gain control of Kuwait due to the smaller country’s immense oil reserves.

Because of the invasion, the global market for oil lost stability, gas prices rose, and the overall economy began to shake. So, investors flooded into the gold market to ride out the storm until the situation sorted itself out or, more likely, got sorted out.

Gold investors didn’t wait, though. Only two months later, in October 1990, gold rose significantly during the period, reaching levels around the high-$300s per ounce. At the time, gold was trading at around $375/oz, so this peak represented an increase of more than 10% in just two months.

However, the US-led coalition quickly intervened and caused the invasion to come to an end. By February 1991, the hostilities had mostly ended, and gold’s price had returned to its previous level.

Key takeaways:

• Gold investors can react quite quickly to the outbreak of war or other hostilities. As mentioned, it only took two months for the price of gold to increase 10% – and that was in the days before the internet.
• The effect on gold’s price may not be permanent. Depending on the length, severity, and outcome of the conflict, the increase to gold’s price could only be temporary.

The Russia-Ukraine War

The Russia-Ukraine War is the ongoing conflict between the two Eastern European countries that began in February 2022. Russia, which sought to reclaim some of its previous territory and establish several strategic positions, swept into the neighboring country with the bulk of its conventional military might. However, unlike the Iraq-Kuwait War mentioned above, this one did not come to a swift end.

Instead, it has proven to be a source of great international consternation, as the two combatants are significantly larger players on the world stage. Frankly, it is also a more distressing event because the two countries are so much better equipped to fight one another.

Nevertheless, we observed a similar spike in the price of gold shortly after Russia crossed into Ukrainian territory. At the time of the invasion, gold traded at or below $1,900/oz. Only two weeks later, the price surged toward $2,000/oz, a level it had not approached since the peak of the COVID-19 pandemic two years prior.

Perhaps the most interesting aspect of this spike, however, is that it behaved largely the same way as the one observed during the First Iraq-Kuwait War. The price retreated back under $2,000/oz as quickly as it arrived, and by October 2022, an ounce of gold cost not much more than $1,600 to buy.

Key takeaways:

• The emotional impact of war can still generate a spike in the price of gold, even in the era of ready information and sophisticated financial technology. In fact, the increase of gold might happen much more rapidly – two weeks vs. two months.
• The price spike is likely to fade. Even if the war continues, the initial fear that drives the increase in gold’s price fades away.

The COVID-19 Pandemic

The respiratory virus that came to be known as COVID-19 thrust the world into a panic not seen in decades. Fears over the spread of the disease drove lawmakers and policymakers to close borders and public spaces.

The effect on the economy was manifest, as many major world powers all but shut down their production. Many businesses did not survive.

So, it should come as no surprise that the pandemic was coincident with a major increase in the price of gold. The World Health Organization declared the outbreak to be a pandemic in March 2020, and gold reached a then-record high only five months later in August 2020. In fact, gold, which had been trading as low as $1,471/oz in March, was nearly $600 more expensive in August.

However, amazingly enough, the price of gold did not stay elevated even as the pandemic continued to be in effect. By the time the following March rolled around in 2021, gold’s price had sunk beneath $1,700/oz once again.

Key takeaways:

• Geopolitical crises don’t have to be wars to influence the price of gold. In this case, a global pandemic was the precipitating event, not the outbreak of hostilities somewhere.
  Even with pandemics, the public’s fear doesn’t sustain the price of gold forever. Gold’s price fell off by $300 only seven months after the peak of COVID-19.

Why Gold Doesn’t Rise Forever

You’ve probably detected a particular pattern associated with the outbreak of geopolitical crises and the effect they have on the price of gold. The event happens, the price of gold spikes, then it recedes – not unlike a wave.

Now, the degree to which the price recedes is not as clear. In some cases, the price of gold might go back to its previous level. In others, it might not go all the way back down. In some cases, the price of gold may even drop below the old level.

The reason for the initial rise is clear enough – everyone gets scared and panics a little bit, so they buy gold to feel more secure. However, as the crisis turns out not to be the end of the world and/or it becomes the new normal, the fear and emotion fade, and people return to their “normal” investment strategies.

That said, the geopolitical event may have a material effect on the factors that govern the supply and demand for gold. So, there may be a permanent or long-lasting effect on gold’s price that is not emotional in nature.

Other Economic Factors Still Matter

Ultimately, geopolitical events may have a noticeable short-term effect on the price of gold, but other economic factors are better gauges of the long-term outlook for the progression of gold’s value. Factors that tend to be more consistently influential on gold’s price include:

Interest rates – Interest rates tend to vary inversely with the price of gold because of the risk/return proposition that interest rate changes suggest. As the interest rate goes up, the return on traditional investments improves, and the demand for gold (and its price) falls. When rates go down, the opposite situation occurs.

Inflation – Governments add more currency to their money supplies for a variety of reasons, but the effect is fairly universal – each piece of currency is devalued or diluted in the process. Because gold cannot be diluted, investors seek it out in times of high inflation. So, as inflation persists and/or increases, the price of gold will increase, both due to the increased demand and the dilution of the currency itself.

Supply and logistics – Gold is, first and foremost, a tangible commodity, and much of its value stems from its rarity. That rarity has to do with the difficulty of finding and transporting more gold to the market. Thus, any changes in the ability of mining interests to bring gold to be refined, or for refiners to produce bullion of appropriate quality and purity, can have significant effects on the supply side of gold and, by extension, its price.

How Investors Use Gold During Geopolitical Uncertainty

To close, let’s talk about how savvy investors use gold during times of geopolitical turmoil. When a geopolitical event pops up, those who make gold a major part of their portfolio for a few distinct reasons

Portfolio Diversification – Gold’s value often moves differently from traditional investments, so the possession of it can help fortify one’s portfolio against downturns.

Wealth Preservation – If the economy is sinking or the value of the fiat currency is in decline, investors seek to protect the value of their assets with the tangible and intrinsic properties offered by gold. In other words, if everything else is losing value, gold has historically tended to retain value better than many traditional assets.

Long-Term Hedge – Gold can also offer investors a way to decrease the overall risk of their portfolios by serving as a hedge against economic downturns. If a significant portion of their long-term strategy requires specific economic conditions, it’s good to have a backup plan if those do not occur.

Geopolitical conflicts can be quite unnerving, especially for those of us who have money out in the markets. Gold can serve as a bulwark against the uncertainties presented by wars, trade disputes, or health crises due to its constant, tangible, and steadfast nature as a thing of value.

Thus, it’s usually a good idea to have some of your net worth stashed in gold. You never know when a new situation will occur that makes your footing seem a bit less certain.