Focus
Gold occupies a unique position in the international financial system, and recent surges in gold prices amid rising geopolitical fragmentation have reignited academic interest in its dynamics. To examine the link between geopolitical risks and agents’ decisions to seek refuge in gold it is important to consider the macro-financial landscape, which may strengthen or weaken the tendency to move into gold during periods of geopolitical tensions. We investigate the impact of geopolitical risks on gold prices under changing global financial conditions.
Contribution
Geopolitical risks are typically associated with tighter financial conditions. However, recent data reveal this relationship weakened between 2024 and 2026. Against this background, we investigate how global financial conditions shape gold’s safe haven behaviour during surges in geopolitical risk. To do this, we first distinguish geopolitical shocks from broader financial uncertainty. This enables us to separate safe haven effects from flight-to-quality dynamics. We then use these shocks to measure the impact on gold prices under different financial and geopolitical conditions. Finally, we examine the factors that explain why gold’s response can differ depending on the circumstances.
Findings
We find that increases in geopolitical risks – both geopolitical threats and realised events – boost gold returns. Stronger effects are observed during periods of loose financial conditions. We break this relationship down into two possible explanations: (i) the credit and liquidity risk channel; and (ii) the opportunity cost channel. Our findings provide stronger support for the first explanation, suggesting that the key factor is investors’ capacity to rebalance. By contrast, the evidence for the second channel is less conclusive. Finally, we find that the largest impact occurs when periods of loose financial conditions coincide with periods of geopolitical escalations, as observed during 2024–26.
Abstract
This paper analyses the state-dependent effects of geopolitical risks on gold prices (i.e. the safe-haven role of gold), conditional on financial conditions. Geopolitical risks are often associated with tighter financial conditions. However, recent data reveal a decoupling be tween such shocks and more restrictive financial conditions, raising the question of how gold returns are affected by geopolitical shocks, conditional on the macro-financial environment. Using monthly data from 1990 to 2026, we find that increases in geopolitical risks– both geopolitical threats and realised events– increase gold returns, with stronger effects ob served during periods of loose financial conditions. We decompose this relationship into two mechanisms: (i) the credit and liquidity risk channel and (ii) the opportunity cost channel. Our findings indicate that the relationship operates most clearly through the first channel, suggesting that the key factor is investors’ capacity to rebalance, while the evidence for the second channel is less conclusive. Finally, we also find that the largest impact occurs when periods of loose financial conditions are compounded with periods of geopolitical escala tions, as seen in 2024–26. These insights highlight the relevance of understanding gold as a safe-haven asset amid complex macro-financial conditions.
