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What happens to gold in an oil crisis?
It goes up.
When the first crisis hit back in 1973 in the wake of the Arab-Israeli war, nothing happened immediately. But then as the impact of the embargo began to be felt in the US – and in particular as oil began to be rationed – that changed.
The price of gold doubled in less than four months from $85 an ounce to $180, with the peak coming just as the embargo ended. The price then eased slightly. But as GMP Securities point out, the end result was that it stabilised in a much higher range – $130-$150 – than it had previously held.
The same thing happened the next time round. As the Iranian Revolution and then hostage crisis developed, the gold price spiked to $850: the rise started as the Shah lost control and kept going when Carter deregulated the oil price. Then it went parabolic when the US embassy in Tehran was seized, topping out only as the Carter Doctrine (which stated that anything that threatened US energy supplies threatened US security) was announced.
However, when gold fell back, it didn’t, as you might have expected it to do, fall back to $200. Instead it moved into yet another higher range – around the $600 level. On both occasions the rise – and its new high range – was driven by two things, geopolitical risk perceptions and the inflation triggered by the rising price of oil.
So what now? You could argue that we haven’t yet got an energy crisis: the price of oil is up but not yet startlingly so and at the same time energy dependence is not quite what it was back in 1973. But what if the crisis in the Middle East spreads? According to George Albino of GMP, the same thing will happen again: inflation and a geopolitical risk premium will once again “have a very significant impact” on short term and, just as in the 1970s, on medium term gold prices too.
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