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What will happen to gold as geopolitical risks hit 25-year high?

Friday, December 4, 2015

With gold viewed as a traditional insurance mechanism to protect against turbulent times, a great deal of attention is paid to political upheaval. Generally speaking, more unrest results in higher gold prices as people flock back to the precious metal as a safe haven.

But with gold prices running close to a six-year low, there has been a lot of debate in the markets as to just when this price increase will materialise given the mounting levels of unrest we're seeing on a global scale.

A recent report from Citi Research has increased discussion on this topic after stating that geopolitical risks are at “a 25-year high”.

The report suggests that we are close to a “tipping point” due to the spread of political turbulence. Indeed, there are four serious factors that together are at serious risk of upsetting the balance of our current financial systems. These are listed by Citi as: the conflict between Russia and Ukraine; the situation in Syria concerning ISIS; what Citi describes as “weak and failing states”, and finally the escalating tensions in the South China Sea.

With Britain's decision this week (Wednesday, 2nd December) to join France and its other allies in airstrikes on Syria, the stakes have been raised yet further. And Citi's report makes it clear that there is a strong chance that levels of uncertainty will continue to grow, noting that while political risks have largely been “masked by cheap and abundant liquidity from central banks and shale […], declining institutional capacity and trust in elites is helping local grievances gather momentum, suggesting that political fragmentation will continue and regional political risks could yet become systemic”.

The debate now is focused on just what will happen should this “systemic” risk materialise. The answer is far from clear but as debate grows around the security of debt-based investments, interest in solid investment products like gold looks set to rise.