The beginning period of this year saw the development of the Russian/Ukraine crises. This year also experienced further escalation in the Mideast region with tensions flaring up in Syria, Egypt, Israel, and Iraq. On the other side of the globe, the US dollar plummeted to new lows as the consistent negative payment along with the emergence of Yuan as an international monetary currency has put pressure on the dollar value in the exchange market. Finally, the Eurozone continued its free fall into the debt hole with the ever-growing prospect that the PIGS (Portugal, Ireland, Greece, and Spain) would default on their debts.
Although the above scenario may appear independent and remote, it directly impacts gold and silver prices in the Forex market. When disaster strikes, like the one described above, gold and silver prices generally experience an upward trend. Investors flock to precious metal investments during such dire times as these investment options are generally regarded as a perfect hedge against political crises.
As you engage in Forex trading, you will realize that the value of gold, silver, and other currencies changes in line with the geopolitical conditions. Political events are constantly occurring across the globe – whether it relates to the nomination of a new leader of a country that plays a key role in the global economic market, or political instability of such nature that it threatens international trade. They represent political risks that have a direct impact on the price of commodities. It creates doubt among investors about expected returns from traditional investment avenues such as stocks, bonds, and options. It is therefore important that you understand the political risks of gold and silver currency investment
Why Investors Turn to Gold During Political Turmoil?
The reason investors turn to gold and other similar commodities during geo-political unrest is that they are considered “safe haven” assets by most investors. Investors generally believe that political tensions that disrupt international trade will result in global economic crises. This is especially true of political tensions in Russia and the Middle East since much of the global oil supply is produced in those regions.
They believe that disruption in oil supply will result in an increase in the prices of goods or inflation. Inflation in turn will eventually cause the stock prices to tumble as companies face losses due to increased prices. The overall outcome is that the returns from traditional investment vehicles like stocks and bonds of companies will decline. That’s why investors flock to gold and other precious metals to earn stable returns on the investment resulting in an increase in gold and silver prices in the commodities market.