There’s a reason they give gold and silver Olympic medals. The precious metals have been highly prized since the dawn of civilisation – and today, they are still seen as a safe haven for investors.
First, it’s important to understand how and why gold and silver prices move on the international markets.
Because they are seen as a safe haven due to their intrinsic value, gold and silver prices soar in times of war or severe terrorist threat.
In 1990, in the run-up to the Gulf War, the gold price rocketed. When Saddam Hussein invaded Kuwait on August 2 gold shot up from $380 per troy ounce to more than $412 on August 23.
The price then fluctuated, falling back before peaking again at $387 in early January 1991 as the deadline for Saddam to withdraw his troops loomed, before dropping back once more as the overwhelming US-led invasion got under way.
Similar patterns can be seen in the run-up to and during the Iraq War, and the crisis concerning the possibility of military action over Iran’s nuclear programme in November 2007, when gold reached a 27-year high of $806.
The Al Qaeda attack on the World Trade Centre on September 11, 2001 – 9/11 – saw gold prices spike from $215.50 to $287 an ounce in London trading (New York markets were shut down).
Great Financial Crisis
So does this mean gold always rises in times of crisis? Not necessarily. During economic crises they often behave differently.
During the financial crisis of 2007-09, you might have expected gold to soar given the global banking system was in meltdown.
And indeed, it did – initially. In fact gold had been rising for some time as the dollar weakened from 2004, and spiked at the start of the financial crisis, rising from $653 on August 13, 2007 to $978.5 on March 3, 2008.
However, then something apparently strange occurred (see chart) – in the midst of the sub-prime crisis, gold began to fall, and the dollar started to rise from a low of ¢94.99 on July 14, 2008 (measured against a basket of other currencies – the Trade Weighted US Dollar Index).
The reason is that the dollar is also seen as a safe haven, based on America’s vast underlying economic strength, and has become the world’s primary ‘reserve currency’.
An economic crisis, almost anywhere in the world, will see companies selling assets or local currencies and piling into dollars, rather like someone hoarding their cash under the mattress because they don’t trust the banks.
As with anything that is in huge demand, the price of the dollar then rises, and the price of that other safe haven, gold, will fall – in fact, they often move inversely.
In 2009, the US government introducing quantitative easing (QE) – effectively printing money by the back door, flooding the economy with cash. The dollar fell like a stone from a high of ¢114.38 on March 2 to ¢100.22 on November 30.
Meanwhile gold rose from $742.0 on November 3, 2008 as QE was announced to $1,203.25 on November 30 – a dramatic 38% rise in just under a month.
As further rounds of QE followed, weakening the dollar further, the price of gold continued to rise to an all-time record high of more than $1,900 in August 2011.
So what can we learn from this dramatic episode?
That gold prices will often mirror the dollar, rising as it falls, and falling as it rises – though it’s far from being a precise mirror image, more a distorted reflection – and great care needs to be taken when investing.
And that war, and rumours of war, will almost always push up gold prices.
What about silver?
But what of silver, that other precious metal that was once used as a universal currency by most of the world?