Explosive Gold and Oil Prices and the Israel Palestine War
- By FXT
- October 19, 2023
- FXT Analysis
Why Does Gold Rally In Times of War?
Gold was once a form of backing of currency, where the amount of gold in reserve was linked to that currency’s value. Check out this article to understand more on gold and FIAT currency.
When conflicts arise such as the Israel Palestine war or the Ukraine-Russia war, gold acts as an insurance against deflation of currency and can help minimise risk against holding a currency that lands in hot water during the conflict and protects against inflation.
When Germany found itself subject to hyperinflation after the war, where wages were deflating heavily within hours, the value of gold held steady against the price of goods, services and other global currencies that weren’t being deflated as aggressively.
Holding gold allowed a sense of strength and stability on the asset when cash was subject to greater problems.
Why is oil important today?
Oil is used to fuel a nation’s war machine, without oil many of the important vehicles owned by the nation will be unable to run. As the need for oil increases, so to does the value. Traders and investors often look for opportunity in oil around times of conflict due to the inherent added volatility, plus the increased demand giving a fundamental reason to buy.
How is Oil different to Gold as an Asset?
Global oil production and release is subject to a body called OPEC, who make decisions based on supply and demand, allowing the sale of oil to increase or decrease. In times of conflict, there is the possibility that OPEC may increase the availability and abundance of oil to keep the world’s oil needs met. On the other hand, they could make a decision to reduce oil access which would make the price skyrocket.
As mentioned earlier, gold protects against inflation. Gold has more of a sense of currency to the people, due to the ability to hold it, move it, keep it and store it far easier than oil. This allows the owner of gold to potentially use it to sell later, in exchange for local currency or exchange for goods or services in times where hyperinflation have impacted the local currency.
Why does war effect gold?
When nations are at war, there are many implications that may affect local currency, cost of goods and services and assets.
Sanctions can be placed on a country for various reasons, creating political and financial instability. Since gold is a globally priced and accepted asset, owning gold instead of local currency could mean a level of protection against the financial effect of sanctions.
Money in the Bank
When there is an active battle, heading down to the bank to withdraw funds becomes a little riskier. Rather than keeping cash in a bank, people are likely to want their cash on their person in the event they need to leave then and there. Cash can be a difficult resource to hold onto, particularly on a windy day. Gold on the other hand, has high value per gram and can be easily held on your person in the event you need to flee the area, quickly.
Should I Buy Gold Now?
Deciding if you should buy gold now depends on your situation and investment strategy. Let’s look at the factors at play.
Gold is said to safe-haven asset and offer low risk, protecting against things like inflation of goods, deflation of currency and real world situations like access to a saleable asset.
If you are in war torn Israel and looking to exchange your cash for gold so you can easily evacuate if it comes to that, then perhaps it’s a good idea.
If you are looking to boost your portfolio and beat the S&P500 index, then there is a bit more to consider. Holding gold is classed as a financial safe-haven activity. This is meant to create stability and offer protection in your portfolio.
Gold traders may be looking for bigger moves than what a buy and hold investor is considering. Using leverage to buy gold is a common place among traders, allowing smaller amounts of money to access and control large amounts of gold in a position. Traders will look for opportunities to buy and sell gold, particularly around times of global conflict as the volatility generally increases.
To trade gold in a leveraged account you need a broker, and thankfully FXTRADING.com can give you access to gold via a live CFD trading account. Get started today and start trading gold.