On Friday night, terrorists launched coordinated attacks across Paris that killed at least 129 people and injured hundreds more. Will the deadliest terrorist attacks on a Western city since September 11, 2011 affect the gold market?
In the short term, global stocks are going to drop on Monday, with the most significant declines in France, of course. The impact on the French economy may be more profound given the fact that France has the largest number of tourists in the world (France was visited by 84.7 million foreign tourists in 2013) and this sector accounts for an important share of GDP (in 2012, it contributed to 9.7 percent of). This is a bullish factor for gold.
In consequence, the euro will fall against the U.S. dollar. Moreover, the odds for further easing of the European Central Bank’s monetary policy in December increased after the attacks. Greenspan initiated a series of interest cuts after September 11, 2001. Investors should expect the same from Draghi. That will keep pressure on the euro exchange rate and support the greenback (in a crisis investors always flee to the U.S. dollar). This is bad news for the price of gold.
Finally, there should be some safe-haven demand for the yellow metal. Thus, gold may have a boost, as it got after September 11, 2001 (gold prices surged then from $215.50 to $287 an ounce in London trading). Additionally, France has already announced that it would extend its action in Syria in the coming days. Thus, the geopolitical risks are going to rise. This is supportive for the gold market, as geopolitical problems are traditionally positively correlated with the price of gold (however, the impact on gold depends on the type of crisis and sometimes it may be negative, as some military actions rather reduce risks).
However, the reactions will likely be weaker than after attacks of 2001 (remember, gold is a bet against the U.S. economy). Historically, events like this in Europe (e.g. the 2004 Madrid train bombings or 2005 London bombings) did not have any durable effects on the gold market.
The take-home message is that gold should trade higher after terrorist attacks in Paris. However, this positive impact should be only temporary and less intense than in the case of September 11, 2001. Long-term investors should remember that the importance of geopolitical concerns is often overstated.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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