Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Geopolitical shocks pile up, but markets equipped to ride the volatility
Shock geopolitical events inevitably trigger market volatility. Commodity prices, especially gold and oil, typically jump, as do safe-haven currencies and bond prices, notably those in developed economies with short maturities, but equity markets often fall. In troubled times, investors crave ‘safe’ assets while shunning ‘risky’ ones.
So, when Hamas-led Palestinian militants crossed the Israeli border in a surprise attack in the early morning of October 7, oil and gold prices immediately spiked. Gold, which had closed on Friday, October 6, at US$1,833.20 an ounce, jumped to $1,862.56 the following Monday – a 1.6 per cent increase. It has continued its ascent as the Middle East teeters on the edge of full-scale war, closing in the US near $1,970 on Tuesday.
It’s a similar story in the oil market, with the benchmark Brent crude oil price closing on Friday before the Gaza crisis at $84.58 a barrel before rising 4.2 per cent to its Monday close of $88.15. It closed on Tuesday in the US near $90.
That the oil price jumped sharply is no surprise – about 21 per cent of the world’s oil passes through the Strait of Hormuz, the thin stretch of water separating Oman and Iran and connecting the Persian Gulf to the Arabian Sea. Iran, which openly backs Hamas in Gaza and Hezbollah in Lebanon, is the world’s seventh largest producer. There are global fears that the Israeli-Hamas conflict could lead to a wider Middle East war, disrupting oil supplies.
It was little different to the Russian invasion of Ukraine in February 2022. As that tragic event unfolded, oil and gold prices rose, as did wheat prices; Ukraine is the world’s seventh largest producer of the staple crop. Share markets fell as investors assessed geopolitical risk and, perhaps more importantly, higher inflation and consequently tighter monetary policy.
A history of upheaval, with low correlation
All that said, geopolitical events are not a reason for investors to panic sell, as history tells us this risk, which is always with us, has had little impact on markets in the long term. The simple fact is, there is little correlation between major geopolitical events and market upheavals.
The Ukraine conflict is a pertinent reminder of this market truism. In the US, the bellwether S&P 500 index fell nearly 10 per cent in the weeks immediately following the invasion. But markets rebounded a month later, with the S&P trading at a level higher than before the invasion, even as the price of oil remained above $100 a barrel.
Going further back, the world’s most cataclysmic sharemarket crash, in 1929 (an event that ushered in the Great Depression), occurred in a world that was relatively stable. It was weak economies, mass unemployment and tight fiscal policies that had equity markets struggling in the 1930s.
In 1987, it was a similar story. That sharemarket crash occurred at a time when the world seemed relatively benign, with the collapse of the Soviet Union and the conflicts that prompted still to unfold.
Over nearly a century since the 1929 crash, major geopolitical events have jolted markets, but not derailed them. When World War II erupted in September 1939, the US was on the sidelines, but investors weren’t. Over that six-year bloody conflict that cost an estimated 75 million lives, the Dow Jones was up more than 50 per cent.
Pearl Harbor dented investor confidence in the short term – but it soon rallied. Indeed, the bull market of the 1950s started well before World War II finished and wasn’t affected by the ensuing Korean War in the early 1950s. The Cuban missile crisis, numerous Middle East conflicts and even September 11 have had little sustained impact on markets.
In fact, that bull run ended in the 1970s, very much caused by economic conditions as inflation took off – although, to be fair, that was partly due to the first oil crisis that erupted in October 1973 with the Yom Kippur War, which sadly saw its 50th anniversary ushered in by the tragic Hamas attack three weeks ago. Back then, a higher oil price fuelled inflation, and consumers, industry and markets all suffered globally.
But the cheap price of oil was never going to last. The Organization of the Petroleum Exporting Countries (OPEC), which was formed in 1960, began to flex its muscle in the 1970s, determined to extract a much higher price for an energy source that was in strong global demand. The Yom Kippur War was one reason given – the economics of supply and demand was the prime cause.
Investors do need to remain alert to geopolitical events – they do influence markets. But although the human tragedy unfolding in the Middle East and the ongoing war in the Ukraine have global significance, the evidence suggests the long-term impact on markets will be negligible. The depressing fact is that these events are always with us and markets factor this in.
