Israel-Hamas War and the Price of Gold: the Possible Scenarios That Could Impact the Global Economy

The Spotlight

10 minutes read

Oct 26, 2023

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Gold is often seen as a safe-haven asset during geopolitical turmoil. So as tensions rise between Israel and Hamas, how will the conflict impact gold and the world economy?

The fallout from the Israel-Hamas war is significant. 🌍 Not only is it a humanitarian crisis, particularly for the Middle East, but it's also a geopolitical hot potato.

There are already concerns that other countries might get involved in the conflict. If that happens, the global economy, which is already a bit shaky due to the Russian invasion of Ukraine and persistently high inflation, could be pushed into a recession

This could have an impact on investments. So, now is a great time to get in touch with your financial advisor to discuss the potential impacts on the assets you hold and where to put your cash.

(We've heard that gold is a fantastic choice 😉 – and it's even better with free storage.)

So, how might the Israel-Hamas war play out, and what could the potential impacts be? In short: should you worry?

Israel-Hamas war: what has happened?

  • Oct 7: Gunmen from the Palestinian militant group Hamas entered Israel near the Gaza Strip, resulting in around 1,400 Israeli casualties. They also took approximately 200 people hostage.
  • Oct 8: More than 2,700 Palestinians were killed in Israeli military airstrikes in Gaza. Israel initiated a blockade to prevent the entry of essential supplies like food and fuel into Gaza.
  • Oct 10: Israel called up 300,000 reservists, including thousands flown back to the country. Rockets were fired toward Israel from Lebanon and Syria, raising concerns about the escalation of the conflict.
  • Oct 11: Egypt closed the land border with Israel.
  • Oct 12: The US and Egypt collaborated to create a safe passage out of Gaza.
  • Oct 13: Israel issued a 24-hour notice to one million Gaza citizens to leave ahead of what Defence Minister Yoav Gallant said would later be a ground invasion.
  • Oct 14: The US announced the deployment of fighter jets to the Middle East, with Saudi Arabia and China urging the protection of Palestinian civilians.
  • Oct 15: Hossein Amir Abdollahian, the Iranian Foreign Affairs Minister, warned that the conflict could evolve into a multi-front war.
  • Oct 16: A proposed humanitarian ceasefire in Gaza, presented by Russia at a UN Security Council meeting, failed to pass as it omitted any mention of Hamas.
  • Oct 17: An explosion at the al-Ahli Arab Hospital in Gaza resulted in at least 300 casualties, leading to outrage from world leaders.
  • Oct 18: US President Joe Biden arrived in Tel Aviv to speak with Israel's Prime Minister Benjamin Netanyahu. Following the hospital explosion, Jordan cancelled a meeting between Biden and various Arab leaders.

How the gold market has reacted

  • Oct 9: The price of gold saw a 1.7% increase when the markets opened on Monday.
  • Oct 13: The price of gold jumped by 3.84%.
  • Oct 18: Gold prices hit a new high. 📈

The conflict remains a complex and evolving situation with significant regional and global implications.

The price of gold has risen since the war started

As shown in the graph, the price of gold has now gone above £1,630 for the first time since May 2023. This marks a significant increase of 7.77% from its low of £1,479 in August of this year.

Gold prices per ounce from 7 May to 16 October 2023 as the Israel-Hamas conflict broke out
Gold prices per ounce from 7 May to 16 October 2023 as the Israel-Hamas conflict broke out

Nicky Shiels, Head of Metals Strategy at MKS PAMP, finds this increase unsurprising. She notes, "Given that geopolitical developments remain highly fluid at the moment - showing signs of escalation, not stabilization, and certainly not de-escalation - it serves as a reminder of the potential 'war premiums' in both oil and gold."

Nicky highlights the immediate response to Russia's invasion of Ukraine in February 2022, where gold prices rose by 6% that month, marking the strongest month-on-month performance for the precious metal since May 2021.

Gold prices per ounce from 4 Jan to 27 February 2022 during Russia’s invasion of Ukraine
Gold prices per ounce from 4 Jan to 27 February 2022 during Russia’s invasion of Ukraine

At this month’s LBMA Global Precious Metals Conference, the focus was on geopolitical uncertainty, especially around gold.

Nicky, who was in attendance as the Israel situation escalated over the weekend, said delegates thought the war wouldn’t be over soon and the forecast for gold was “mildly bullish” – market speak for prices rising.

“The [Bank for International Settlements] said investors should allocate 4%-6% of their portfolio to gold,” says Nicky, “and that allocation should be higher during periods of elevated tail risks.”

So it’s what unfolds next is what truly matters. Let's delve into the potential scenarios. 🤔

Israel-Hamas war: what happens next?

The Israel-Hamas war is swiftly evolving, drawing the attention of major countries worldwide who are cautiously engaging with the situation. 

While the future remains uncertain, it's crucial to recognize the Middle East's vital role as an energy supplier and critical shipping route.

Historically, conflicts and disputes in this region have had significant ripple effects across the globe.

A case in point: back in 2003, as tensions mounted in the lead-up to the US-Iraq war, gold prices surged by a remarkable 14% before eventually stabilising.

We witnessed a similar surge in gold prices during the Syrian civil war, where the value of this precious metal grew by some 27% in the first six months of the conflict.

What unfolds next is likely to be intertwined with the trajectory of gold prices.

Now may be the time to diversify your portfolio properly. Here’s how.

Experts outline three potential scenarios:

  • The conflict remains contained.
  • Lebanon and Syria are drawn into a proxy war.
  • Iran becomes entangled in a broader regional conflict.

Scenario 1: The war is contained

The map showing Egypt, Gaza, Israel, and the Mediterranean Sea

Containing the Israel-Hamas war to Gaza is the best-case scenario from an economic viewpoint. 🌍

If the fighting doesn't spill out beyond Palestinian territory – this includes the reported cross-border incidents from Syria and Lebanese Hezbollah – then the door for a political or diplomatic solution to the conflict remains on the table.

Speaking in Morocco earlier this week, US Treasury Secretary Janet Yellen said it's essential that the conflict is contained.

"It's critically important that the conflict not spread," said Yellen at an International Monetary Fund and World Bank meeting. "That's what the United States is focused on." 

How likely is this to happen? The US President Joe Biden had flown to Tel Aviv – making him the first president to visit Israel in wartime – to show Israel and Hamas that the world was watching.

However, the US President was then meant to fly to Amman for talks with King Abdullah of Jordan, Egyptian President Abdel Fattah al-Sisi, and Palestinian President Mahmoud Abbas.

These were cancelled following news of an explosion at Al-Ahli Arab Hospital. 

The longer the conflict goes on, the less likely it is that it can be contained as geopolitical risks remain heightened.

🌍 How has the Israel-Hamas war already impacted gold and the global economy?

  • Well, gold prices climbed to a four-week high ahead of the Biden trip.
  • Inflation remained high in the major economies (though gold could help beat it) and oil prices have also risen.
  • If the Federal Reserve cools off rising interest rates in the US, gold could be the winner there too. 
  • The conflict has fueled demand for gold and other safe-haven assets.

Nicky Shiels from MKS PAMP thinks this trend will stay for a while.

"Gold should continue in its new $1800-$1900 range associated with a 'higher for longer' Fed that it no longer fears," she says, "unless economic data and renewed geopolitical risks further escalate to indicate upside risks." 

Scenario 2: The conflict becomes a proxy war

It's evident that dividing lines of support have already emerged in the conflict.

Hezbollah has fired missiles at Israel from Lebanon, and similar attacks have occurred from Syria.

The concern here is the potential involvement of either country in the war. With Iran backing fighters in both regions, the conflict could effectively become a proxy war between Israel and Iran.

A significant increase in the price of oil already reflects anxiety among investors.

Some analysts believe that oil prices could rise by $5–10 a barrel if this conflict escalates into a proxy war. 

The US has already drafted legislation that would green-light the use of US military force should this situation evolve into a proxy war.

🌍What could the impact be on gold and the global economy?

  • Analysis by Bloomberg suggests that a proxy war would lead to a 10% spike in oil prices. 
  • The global economy could experience a loss of around US$300 billion in output. 
  • This would result in one of the weakest growth rates in the last 30 years, at 2.4%. 
  • Investors are likely to seek safe havens for their money, potentially making gold prices rise.

Scenario 3: The conflict becomes a larger regional war with Iran

An explosion in a residential neighborhood

This is the worst-case scenario for all involved. If the conflict does become a proxy war and the US military does wade in, then the likes of Iran and Pakistan have already indicated their potential involvement.

When oil prices jump sharply, they often trigger a global recession. 

This is likely to happen in this situation, as the price per barrel is invariably sensitive to Middle Eastern events. 

A broader conflict would constrain the amount of oil being produced, leading central banks to potentially resume printing money and cutting interest rates. 

Normally, this could bring down the price of gold, but the price would be measured against the ongoing conflict.

However, Nicky Shiels at MKS PAMP believes that the Middle East war has established a floor beneath both bonds and gold prices due to increased uncertainty. 

"With significantly tightened financial conditions – and with the associated lagged effects – together with the backdrop of geopolitical uncertainty, Fed policymakers will remain determined to keep their options open but continue to lean hawkish," Shiels says. "The interest rate-sensitive markets – gold, stocks, bonds – are just OK with that." 

🌍 What could the impact be on gold and the global economy?

  • Bloomberg believes it could knock 1 percentage point off of global growth.
  • They also think global inflation would stay at 6.7% in 2024.
  • Gold prices would likely remain higher for longer as well.

🌟 Will the price of gold rise?

It's already happening, and it's poised to climb even higher due to the Israel-Hamas war. 📈

Conversely, when conflicts ease or diplomatic solutions are reached, gold prices often dip as investors embrace more risk. 

War and economic uncertainty have been closely linked for centuries. In the world of investments, the assets that tend to perform the best include:

  • War stocks: Defense stocks such as Lockheed Martin, Boeing, Northrop Grumman, or General Dynamics.
  • Oil: As one of the two war premiums alongside gold, the price of oil typically surges during conflicts, especially in the Middle East.
  • Gold: Regarded as a safe haven for investors rattled by war, gold can provide stability and security for your investments. 

Is gold still a safe haven asset during wartime? 

Gold holds a long-standing reputation as a safe haven asset – a reliable safety net for investors seeking stability amidst uncertain times, such as war. 

Historically, when conflicts arise or geopolitical tensions escalate, investors tend to flock to gold.

The demand for gold surges because it's perceived as a "safe" investment, primarily owing to its intrinsic value and the fact that it's not tied to any specific country or government. 

In the previous Israel-Hamas conflict in May 2021, gold prices saw a significant increase. 

Gold prices per ounce from 26 Mar to 27 May 2021 during the last Israel-Hamas conflict
Gold prices per ounce from 26 Mar to 27 May 2021 during the last Israel-Hamas conflict

During the first week of the conflict, gold prices surged by approximately 5.4% due to the escalating tensions and the uncertainty surrounding the situation. 

Taking a broader historical view, during significant conflicts like the Gulf War, gold prices experienced substantial rises. 

Gold prices per ounce from 2 August to 5 September 1991 during the first Gulf War
Gold prices per ounce from 2 August to 5 September 1991 during the first Gulf War

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