Why Is Gold Down During a War?

“Gold is for war” is a well-known saying in the precious metals investing community. So, when the United States and Israel attacked Iran on February 28th of this year, investors probably expected a much different reaction in the precious metals market than what followed. Gold is down 13% since the beginning of the war and silver is down 18%. The question, then, is whether our well-known saying is wrong or simply didn’t work this time for some reason.

One theory, proposed by Clem Chambers, is that the well-known saying held up this time and has simply been misunderstood. “Gold is for war,” which is maybe why gold increased by 24% in the month leading up to the war. It increased in anticipation of the war as insiders bought up the metal. When the bombs started flying, the gold holders, many of them central banks of large countries, started selling off their holdings to prepare for possible conflict. One example of this is Turkey, which sold off $8 billion of its gold holdings recently, according to The Economist.

Where Is Gold Headed Next?

It seems that, for now, gold is a slave to the war. If the conflict continues, expect gold to slump. The good news is that slumping gold is still at a high price relative to where it was just a few months ago, showing the metal’s resilience. If the conflict resolves soon, expect gold and silver to recover sharply. If the war continues to drag on for an extended period of time, then the story is completely different. As oil prices stay high, the economy continues to suffer and the probability of a recession increases. A deflationary recession will cause the price of gold, silver and other assets to drop initially. However, when the Fed reacts by lowering interest rates they will rebound sharply.

When To Buy More Gold?

There are two dates I have my eye on and one of them is right now. As Rafi Farber and Alasdair Macleod have pointed out, open interest for gold and silver on the Comex are at historical lows. These are exactly the kind of contrarian indicators that an investor should look out for. The low open interest indicates that gold and silver are likely currently undervalued. The second possible date is when the war resolves, which is difficult to predict given the unpredictable behavior of President Trump. If the war drags on and we enter a recession, there will likely be a good opportunity to buy gold in the $3000s and silver near $50.

This article is for informational and educational purposes only and does not constitute financial advice. The author is not a licensed financial advisor. Always do your own research before making investment decisions.