It is chaos theory that states that a butterfly flapping its wings in one place can start a hurricane somewhere else. Recent events in Ukraine have been a similar catalyst for turmoil in the financial markets. What started as protests a few months ago in Kiev has developed into a superpower standoff. The potential for further unpredictable escalation in the conflict has left investors running for cover with gold in their sights.
Domestic Issues in Ukraine Demanding Global Attention
The saga kicked off when the Ukrainian government, headed by President Viktor Yanukovych, suddenly backed out of a trade agreement with the European Union to cozy up with Russia instead. Many Ukrainians advocated the agreement with Europe as being a means to end corruption, which was only benefitting the elite to the detriment of others. As the Ukrainian government sought favor with Russia, the frustration among resentful citizens boiled over into protests.
Kiev turned into a battleground as government forces clashed with protesters. The position of President Yanukovych became increasingly untenable as opposition to his rule grew in strength. Amidst the tension, the ousted president fled to Russia, which has since deployed troops in the conflicted areas of Ukraine.
Many Western and Southeast Asian countries have strongly condemned Russia’s involvement, and are calling for sanctions that could sever trade ties with the invidious world power. Further military actions by Russia would place Western powers in a dilemma with how to effectively respond without allowing the conflict to spiral out of control.
Gold Shines More Brightly in the Flames of Turmoil
With any large-scale global dispute, investors begin to weigh the financial ramifications on the international markets. Global stocks, specifically in Europe, took a hit amid the height of conflict on Monday, while investors sought shelter in gold. The gold price jumped to a new four-month high closing over $1,350 an ounce on Monday when tensions were running highest.
Buying gold at times of crisis is a natural response for investors. In the worst-case scenario of any conflict, physical holdings of precious metals such as gold provide the only guaranteed store of wealth. Geopolitical risks increase the appeal of safe haven investments such as gold, thus sending prices upward.
Gold is likely to remain in the crosshairs of many investors considering the likelihood of hostilities in various places across the globe. Even though cooler heads have prevailed so far over Ukraine, the situation remains volatile and highly explosive. Other hot spots include the Middle East, China and its claims over the South China Sea, as well as nuclear powers such as Pakistan, India, North Korea, and potentially Iran.
The smallest of squabbles in any of these places could trigger a larger battle. If the worst was to happen, any gold on hand would be well worth having.