At the time of writing the price of gold is just cooling off from its rocket-ride up to $1,369/oz. Gold’s five-week rise has been attributed to the Ukraine crisis, as well as concerns over the viability of the Chinese economy.
This is a sharp change compared to the last few months when anyone would have been forgiven for thinking that gold was entirely dependent on the FOMC’s tapering programme, what Janet Yellen said during her testimonials and non-farm payroll data.
Depending on who you believe, the situation in Ukraine may affect the gold price for some time. As we wrote about earlier today, few people are likely to want to be short gold at the moment, particularly ahead of the referendum due to take place on Sunday.
Of course, gold isn’t the only asset or commodity in the limelight thanks to the Ukraine situation. Natural gas, wheat, palladium and oil are also under scrutiny.
However, unlike those mentioned above, gold is seen as a safe haven. It is a faceless currency and is the money of choice, by both governments and citizens, when it comes to times of war and financial warfare.
Gold’s role as a safe haven is where the price rise comes in but more on that later. The rumoured movement of Syria’s gold reserves is also a key point to consider.
Did America take Ukraine’s gold?
Last week reports from Ukraine stated that 40 sealed boxes, containing gold bullion, were seen being loaded onto ‘an unidentified transport aircraft in Kiev’s Borispol airport.’
The same report cited a source in the Ukrainian government who apparently confirmed the shipment of the gold from the Eastern European country to the US.
Whilst this may seem far-fetched, remember the story we recently reported of the movement of China’s gold to Taiwan. In 1948, British journalist George Vine gave an eye-witness account from his fifth-floor office window of how he saw manual labourers padding in and out of the central bank, in single file, carrying two parcels on a bamboo pole. From there they walked their parcels up a gangplank onto a freighter that had been moored up outside the ‘Peace hotel’ (according to author William J. Gingles).
Realising the significance of what he was seeing, Sterling Seagrave writes (in The Soong Dynasty) that Vine telegraphed his London office with the not-so cryptic message of ‘all the gold in China was being carried out away in the traditional manner – coolies.’
Later Vine wrote, “I could hardly believe what I saw. Below was a file of coolies padding out of the bank. I could even make out their hats . . . and their uniforms of indigo tunic and short baggy trousers,” as they carried “the wrapped parcels of gold bullion on either end of their bamboo poles” to load onto a ship bound for Taiwan.
Back to the Ukraine, sending the gold to the US for ‘safe-keeping’ seems a laughable idea at present. Particularly as Germany is struggling to get their own gold back from the super-power, who also offered to keep it there for safe-keeping during the Cold War.
If this tale is true, the chances of the Ukrainians seeing the gold once again is slim. The Americans are unlikely to hand back any monetary assets now that the Russians are involved and likely to become even more engrained in the country than they are already.
Bearing in mind the Germans are short a few hundred tonnes from the Americans, it wouldn’t surprise me if they suddenly find themselves receiving a surprise shipment of 42.3 tonnes (the sum of Ukraine’s reserves).
What happens to gold during times of war?
So, now to the price. The recent price rise has seen a clamour of Westerners and speculators jumping on the gold bandwagon. Is this because the gold price will rise when there is a war?
It was inevitable that the Ukraine crisis would cause problems in financial markets given the questions of sovereignty and international law. As we know from recent events in Syria and beyond, international law states that force cannot be used unless there is a need for self-defence or the UN Security Council orders it so.
This is yet to happen in Ukraine and yet two major powers, Russia (who has the most to lose) and the US are circling, preparing their weapons.
John Browne recently wrote an excellent article outlining the position of both Russia and US and their geopolitical weaknesses.
One key point he mentions is that, ‘Washington must be conscious of the possibility of Russia striking back at the U.S. economically through disruptive sales of its $138 billion war chest of Treasury bonds. Such a move could trigger a financial panic in the West, especially if the moves could be coordinated with Russian allies.’
As Jim Rickards explains in Currency Wars and most recently The Death of Money, financial warfare is the most powerful of weapons. The danger to the dollar and the international system is significant and no-one wants to be holding paper money when that ship sinks.
Back in September the world’s eye were turned on Syria. With every comment from the countries involved there was a ripple effect in financial markets. We took a look at what it would mean for gold.
In the last month, the gold price has climbed 8% on the back of talk surrounding Ukraine. This is a similar reaction to when the press and political bods were postulating over the Syria crisis, in the key month (September), the calm before the expected storm, the price of gold rose 9%.
Seeing this in September, we looked at what happened to the price of gold when military action is rumoured. Looking at three wars: the Iraq War, the first Gulf War and the rumoured military action in Iran we saw that the jump in the price of gold following talk of war was at its most acute.
Interestingly however in cases of both rumoured military action which results in no warfare (Iran) and military action, the gold price returned to levels seen prior to those before the event.
This should be reassuring to investors. Bear in mind, the gold price was rising prior to the Ukraine crisis. This was nothing to do with geopolitical concerns but instead issues that do not come and go as quickly such as the US economic recovery, concerns over China’s credit bubble and, of course, the ongoing demand for physical gold.
This means that should (somehow) the Ukraine situation just fizzle out then gold still has significant support, as was the case with the previous wars I mentioned.
Discussions of war, and wars themselves, clearly affect the gold price positively. However, how much of gold’s long-term climb follows wars and discussions surrounding them is questionable.
For those looking to buy gold, don’t base it around events in Ukraine, as this is just one pawn in a very large financial chess game.
Our previous research found that the gold price peaks prior to and at the beginning of military actions, before returning to levels not seen long before. So, if you’re worried that you missed out on gold at $1,325/oz, you may well be in luck.
What allows wars to take place? Money-printing, the same thing that has been going on since before I left university. Will this war change that? No, it just means that money-printing will have a new name for a while.
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