Will the Georgia Conflict Affect Gold and Silver Prices?

Geopolitical risk looks to be building back into the crude oil and PM markets this Sunday evening (Monday already in the Far East) as Russia and Georgia hurtle toward each other in a dangerous escalation of their "Summer Olympics" conflict over two small corners of the Caucasus. Whether this becomes all out war or just another flare up that has yet again claimed the lives of many innocents on both sides, the situation looks to have serious short and long term implications for regional security and the relationship between the great powers.

So far ,as of 6:45 PM PDT on Sunday night, oil is up a buck, gold is up 5 bucks and silver is up a dime. In other words, the early risers don't think much will go wrong here. But, what "could" go wrong?

On Christmas Eve, 1979, the Soviet Union invaded Afghanistan. Gold was trading around $460 that week and silver was rising strongly through $23. Exactly four weeks later the prices of silver and gold had doubled in a classic blow-off peak. And even though gold and silver began a bear market decline the very next day that wouldn't end for more than 20 years, gold didn't trade below its Christmas 1979 price until March 1981. Silver, ever the volatile one, did decline below its Christmas 1979 price by March 1980 but it briefly surpassed that level again for a day in September 1980 before finally giving up the ghost.

Now mind you, Afghanistan was no close ally of the U.S.. Nor did it seek NATO membership, nor had it been promised future entry into that less-and-less exclusive club like Georgia has been.

Our pragmatic side says the odds favor a de-escalation of hostilities between Georgia and Russia in the days ahead, perhaps followed by a Chechnya-style low intensity conflict or a UN-observed peace deal. Our wild, reckless side says these hostilities might be the prelude to WWIII, reminiscent of another WW started because of entangling alliances that dragged nation states into centuries-old backwoods disagreements.

Be that as it may, this event has demonstrated very clearly that we should hold some gold and silver not only because of what will happen at some point in the indeterminate future, but what could happen over a single weekend, even during the Summer Olympics. Or, of course, the Christmas holidays.

Disclosure: Long SLV, no position GLD or USO.

Comments

[Francis Sch...:]

Excellent article and question. I have no doubt the conflict would have affected the price of Gold and Oil if the war would have happened 3 or 4 months ago. Or at least it would have been explained that way by the media. Now that the overall sentiment for yellow and black gold is negative, there wasn't any impact at all. Ironically, it has to be noted that for some reason, no damage was done to the pipeline.

2008 Aug 12 05:12 PM