Nice, Turkey And Gold

Monday, July 25, 2016

Gold prices fell the day after the terrorist attack in Nice (France), but rose initially on Turkey’s coup. Why does gold react differently to distinct geopolitical events?

Nice and Gold

On 14 July, Mohamed Lahouaiej-Bouhlel, a Tunisian resident of France, deliberately drove a truck into crowds celebrating Bastille Day in Nice, France. In consequence, 84 people were killed and more than 300 injured. The price of gold rose in early trading on political uncertainty after this terrorist attack in France, but all gains were only temporarily. Actually gold prices fell the day after.

Turkey and Gold

On 15 July, the Turkish army attempted to seize control of several key places in the country. However, the next day forces loyal to Turkish president Recep Tayyip Erdoğan regained control and a coup d’état ultimately failed. The coup, which killed more than 300 people and injured more than 1,500 people, was followed by mass arrests. After first information about the attempted coup was released, gold prices turned higher. However, the price of gold fell on Monday, when it became apparent that the coup failed and that the government was able to remain in control of the country.

Why Does Gold React Differently to Distinct Geopolitical Events?

Both events failed to raise non-temporary safe-haven bids. In the case of Turkey it makes some sense, as the coup failed, but the basic question remains: why does gold react differently to distinct geopolitical events? We have written about geopolitics and gold several times, but it is worth reiterating that the reaction of gold prices to geopolitical events depends on the details, mainly on the potential impact of the event on the U.S. economy. Investors should remember that gold is to a large extent a bet against the greenback. Therefore, the price of gold reacts significantly to terrorist attacks only if they threaten America and its economy. The classic example are the 9/11 attacks, when gold prices surged from $215.50 to $287 per ounce in London.

On the other hand, terrorist attacks (or other geopolitical events) which occur overseas and not in America often do not have any durable effects on the gold market, or they even exert downward pressure on gold, as there is a flight to safety from Europe to the U.S and the U.S. dollar appreciates. This explains why none of the Paris, Brussels or Nice attacks boosted gold. In all these cases, America was not threatened and their scope was limited to Europe, hence the lack of gold’s bullish response.

In the case of the Turkish coup, the US also was not threatened, but Turkey is an important NATO ally in the Middle East and its instability caused some worries. This is why the price of gold increased a bit, but fell later when it became clear that the coup had failed.

Conclusions

Gold did not lose its safe-haven appeal. Investors should remember that gold is not a safe-haven asset against all evil under the sun. It is a bet against the US economy and its currency. The greenback is a world reserve currency and gold is its major competitor, or only an alternative when the US dollar itself is threatened. You can think of it as the greenback being the safe-haven for the world, but gold is the safe-haven for America, or the ultimate safe-haven used only when the US dollar fails. Or another explanation: gold is priced globally in the greenback. Therefore, it may supersede the US dollar only when the American economy is in really bad condition. Hence, the impact of geopolitical events on the gold market depends on whether it is a threat for the US economy and greenback. Investors should always remember this to avoid a disappointment when the yellow metal does not react to all geopolitical concerns.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly Gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast, and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.