Why gold prices skyrocket when there is a war?

On Friday (13 October), the yellow metal registered an intraday rise of ₹1497 per 10 gm on the Multi Commodity Exchange (MCX). The gold future contract for December expiry on MCX ended 2.58% higher at ₹59,415 per 10 gm levels on Friday.

The rally in gold was seen in the times of the Russia-Ukraine war also. The Russia-Ukraine war started on 24 February 2022. On 7 March 2022, Indian gold prices were up by around ₹1000/10 grams. The 22-carat gold prices were quoted at ₹49,400/10 grams and the 24-carat gold rates were quoted at ₹53,890/10 grams.

The big question: Will the rally in gold continue and for how long? And will the Israel-Hamas war give a further boost to gold prices?

Gold benefits from economic distress as investors tend to shun risky assets

“Many people, businesses, and even governments allocate gold in their portfolios as a hedge for the doomsday scenario. It works like insurance. The ongoing conflict between Ukraine-Russia and Israeli-Palestine can disrupt the long-term geopolitical equations, global supply chains, and trust in financial instruments. To minimize such risks, investors increase their allocation to the yellow metal. Another important aspect here is that investors prefer physical gold over any sovereign-backed gold securities in doomsday-like scenarios. This is because sovereign-backed gold is merely a promissory note by the Government,” said Anshul Gupta, Co-Founder and Chief Investment Officer, at Wint Wealth.

Geopolitics conflict and its Impact on gold

After a strong rally in 2021 and 2022. Gold has been a poor performance so far this year. “Strong rally in equities and attractive bond yields have also weighed on gold as investors move away from gold in favour of other assets,” said Alekh Yadav, Head of Investment Products, Sanctum Wealth.

However, with the Israel-Palestine issue and the rise in geopolitical risks, we think it may make sense to remove overweight gold. Gold has generally acted as a good hedge against geopolitical risks and equity volatility, he added.

Gold investment has gained significant traction as a reliable choice for enhancing portfolio diversity and maintaining financial stability.

One of the primary reasons investors turn to gold is its role as a hedge against inflation and economic uncertainty. “Inflation erodes the purchasing power of traditional currencies, making fixed-income investments less attractive. Gold, however, tends to maintain its value during periods of inflation, preserving investors' wealth. Additionally, during times of economic crisis, gold often experiences increased demand as a safe-haven asset,” said Mahendra Luniya, Chairman, of Vighnaharta Gold Ltd.

Gold: Reasons for price fluctuation

These price fluctuations are influenced by various factors like global gold demand, currency values across nations, and interest rates, among others.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 15 Oct 2023, 07:54 AM IST