How War Affects Gold and Silver

 Recently, Israel declared war on Hamas in response to an attack on the country by the organisation in charge of the Gaza Strip. How such a massive group crossed the heavily guarded Israeli border is a matter of some debate. Nevertheless, Israel has attacked Gaza several times in retaliation. As to reports, both parties are prepared for an extended conflict.

Recently, the epidemic appears to have increased the price of gold.

But during the previous weeks, the price of gold had dropped significantly, and by the event of war declaration, both gold and silver were heavily oversold. Precious metals were therefore probably overdue for a recovery. How much, therefore, is the prospect of a protracted conflict likely to affect the price of gold?

Prior to a conflict breaking out, in February 2022, as tensions between Russia and Ukraine grew, the price of gold appeared to have increased.

Still, the price of gold had been rising since October. Additionally, at the same time, a study on record-high inflation was released in the United States. Therefore, once more, it can be challenging to gauge the degree of influence on the price of gold.

Qassim Soleimani, an Iranian general, was ordered to be killed back in January 2020 by US President Donald Trump. 

Iran then threatened to exact revenge for the general's passing.

There was a lot of bluster from both sides, which increased the likelihood of a confrontation or possibly a war with Iran. However, in the end, hostilities subsided and nothing more significant occurred.

But the violence that is currently raging in Israel is once more fueling fears of a larger conflict in the Middle East.

Looking further back, we also witnessed a very significant increase in the price of precious metals in August 2017. Some pundits at the time suggested that the jump was due to the increased tensions with North Korea. As stated by Bloomberg:

That same day, gold and silver did climb. However, before this tense moment, both metals had dropped precipitously. And large increases in the prices of gold and silver are not surprising when they are oversold, as they were before August 2017.

The general belief is that when there is a conflict, people flee for their lives, which drives up the price of gold. Is this, however, really the case?  

Maybe instead of just making predictions about what might occur if the Israeli-Hamas conflict becomes more extensive and protracted, we ought to consider the past. That is arguably the best approach to think about the potential effects of yet another war on the price of gold and silver.

Consider the conflicts that occurred in the latter part of the 1970s, as was previously mentioned. Before these hostilities broke out, as we have observed, the values of gold and silver were already rising and in a bull market.  

The period of the Vietnam War was 1959–1975.

Nixon's decision to cut the US dollar's last connection to gold in 1971 is frequently attributed in large part to the amount of money needed to finance the war.

How come?

because the United States was able to maintain its vast expenditure on "guns and butter" (war and social programmes) after the gold exchange standard was abandoned. As it had done to finance its expenditures throughout the 1960s, the USA was no longer required to send its gold holdings to foreign creditors.

Therefore, the significant increase in the price of gold in the late 1970s was probably driven by the growth in currency issued up to 1975.

Hence, rather than claiming that war raises the price of gold, perhaps we can argue that increased government debt, expenditure, and currency creation during protracted large wars ultimately drive up the price of gold (and silver).

Therefore, the duration and intensity of a battle may be the primary factor influencing the price of gold and silver.  

Any brief altercation between Israel and Hamas would probably end in the same manner as many of these other shorter-term conflicts.

That is, as soon as the battle starts, the price of gold and silver will soar, but they will soon fall again.

To make a significant difference in the price of precious metals, a protracted conflict spanning several years and involving numerous countries would likely be required. We sincerely hope that doesn't come to pass.

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