The smoking streets of a war torn Ukraine, citizens and militants walking around in the rubble

What Does War in Ukraine Mean for Gold?


Written by Philip Diehl

Jul 30, 2014

What is the connection between the price of gold and civil war in Ukraine? Simple—gold has long been a refuge in times of political turmoil. When investors and savers realize the severity of a threat to their wellbeing, they rush to gold to protect their wealth, driving prices up quickly.

In recent weeks, the conflict in Ukraine has become a proxy war between the West and Russia. It now has the potential to become the most dangerous confrontation between the U.S. and Russia since Kennedy faced down Khrushchev in Cuba in 1962. Financial markets, including the gold market, have not yet recognized this possibility. When they do, investors will rush to gold, one of the world’s oldest and most widely-recognized safe havens.

Malaysian Airlines Flight 17

There was some hope the tragedy of Malaysian Airlines Flight 17 would lead Russian President Vladimir Putin to pull the reins on the Ukrainian pro-Russian separatists and Russian forces that shot down MH 17, thereby reducing the prospect of a confrontation between Russia and the West. But now it’s clear Putin has doubled-down in Ukraine. The confrontation is escalating, not receding.

Russian President Vladimir Putin

Russian President Vladimir Putin

The Putin Strategy

Putin has answered the question of just how resolute he is in pursuing his grand strategy for a new, expansionist Russia. And Europe and the U.S. are finally answering the question of when they would finally recognize the danger.

In recent years, Ukraine has followed the examples of Poland and the Baltic States, drifting away from its historical relationship with Russia and coming to see its future in Europe, not Russia. Putin attempted to preempt Ukraine’s turn to the West with a tried-and-true combination of subversion, political pressure, and economic carrots and sticks. The strategy blew up last year when Ukrainians ousted Putin’s crony head-of-state.

With the failure of his soft-power strategy, Putin made a lightning strike with military force, seizing Crimea. He then set about fomenting a rebellion in eastern Ukraine with the intent of annexing it, too, while crippling and undermining the rest of the country.

Then the rebels shot down MH 17, killing 298. Unfortunately, for Putin, most of the dead are Europeans.

I thought this would wake up Europe to the growing threat Putin posed to their security. But I was wrong. The French, Italians and, most crucially, the Germans continued to equivocate, trying to appear tough while accommodating the interests of their large, multinational firms, which do many billions of dollars in business in Russia. No doubt, this was exactly the response Putin counted on. All bark, no bite.

But, then, Putin’s rebels refused to allow the recovery of bodies, leaving them to rot in the summer heat. This outraged the European public, and as recovery teams, investigators, and western journalists confronted the rebels on the ground, Putin’s proxies showed themselves to be mostly thugs and criminals. This was a PR disaster of epic proportions, and it seems to have been a game-changer.

Ukraine Escalation

Moreover, with the Ukrainian army now scoring major successes on the battlefield, Putin is sending more sophisticated and ever-larger shipments of armaments into Ukraine in an effort to halt what is shaping up to be a military disaster for the rebels—and for Putin. Concern is rising that the Russians might invade Ukraine to prevent a humiliating defeat.

These developments have focused minds in Europe, and resistance to taking strong punitive action against Russia has crumbled in the German, French, and Italian governments.

But this isn’t the first time in recent years that Russia has threatened one of its neighbors. Why is Ukraine different?

Unlike previous interventions, Ukraine is near the heart of Europe. Also, Putin has been extraordinarily audacious, even reckless, in pursuing his ambitions. This recklessness, and the destruction of MH 17, has riveted media attention on the conflict for many weeks and revealed to those who haven’t been paying attention the character of Putin and his proxies.

A history of Russian occupation

Another reason Ukraine is different is that it has forced us to realize that we’ve invited trouble in Ukraine by looking the other way so many times in the past.

In 2008, Russia invaded its neighbor, Georgia, seizing two breakaway regions. The U.S. and Europe did little in response and Russia occupies the territory six years later.

In 1992, Russian troops supported a successful rebellion in a breakaway region of Moldova, a small European nation bordering Ukraine. The West ignored Russia’s intervention and, 22 years later, the troops remain. Today, Moldova is seen as Putin’s third course when he finishes consuming Crimea and eastern Ukraine.

In 1979, the U.S.S.R invaded Afghanistan and waged a nine-year war. If it hadn’t been for congressman Charlie Wilson, the West would have set on its hands.

Putin targets Europe

Putin targets Europe

For many years, Putin has used subversion, economic pressure, and cyber-warfare to intimidate the neighboring democracies of the three Baltic States, much as he has done in Ukraine. A former senior advisor to Putin says Putin’s long-term goals include annexing the Baltic States and portions of Finland.

It might seem like ancient history to us, but Putin also knows the Cold War record of Western acquiescence to Soviet invasions of Czechoslovakia in 1968 and Hungary in 1956.

It has been easy for some in the West to discount the significance of Russian interventions over the past 30 years because they haven’t occurred in Europe’s backyard. But Ukraine is in Europe’s backyard.

It’s one thing if, in the middle of the night, an intruder climbs over your back fence and, when your alarm sounds and the lights flood the yard, he scrambles back over the fence. However, if, instead of fleeing, he brings his friends, well, that’s another thing, entirely.

New York Times on Cuban Missile crisis

Memories of Cuba

In 1962, Nikita Khrushchev made an audacious—reckless, it turned out—attempt to even the nuclear equation with the U.S. by installing missiles in Cuba. The result was a confrontation that brought us as close to a nuclear exchange as we’ve ever come.

There’s no discussion of a nuclear threat in the Ukrainian crisis, and there are other important differences between Ukraine, today, and Cuba in 1962. However, when Khrushchev discovered he had miscalculated in Cuba, he found his back to the wall. We escaped nuclear war because Kennedy allowed Khrushchev a face-saving way out. Nevertheless, Khrushchev’s days as premier were numbered.

Putin may have placed himself in a similar position in Ukraine. The “loss” of Ukraine to Europe was without doubt intolerable to Putin, and he figured he could prevent it at small cost and with little risk through economic threats and incentives. When that failed, he struck quickly and confronted the West with a done-deal in Crimea. And considering the West’s ineffectual responses to Russia’s 30 years of interventions in the affairs of its neighbors, Putin was confident he could get away with annexing eastern Ukraine, too.

But, then things got complicated. Like Khrushchev in Cuba, Putin is directly implicated in events in Ukraine. If it ends badly, his dreams of a New Russia will be on life support. Moreover, Putin is not an autocrat. He depends on support from the Russian oligarchs and kleptocracy, and if his recklessness endangers their economic and political positions, his days, like Khrushchev’s, may be numbered.

For this reason, and because Putin is a megalomaniac with a vision, I doubt he will back down to economic pressure from the West.

The Real Danger

The situation in Ukraine poses real dangers. Russia is already headed into a recession, and new, severe sanctions will deepen it to the point of imposing real pain on citizens and oligarchs alike. Putin is likely to retaliate against European sanctions, and if he cuts off gas supplies to Europe, the fragile European economy will teeter back into recession. Many too-big-to-fail banks in Europe remain vulnerable to financial shocks, and a financial crisis in Europe is likely to jump the Atlantic to America.

The 2007-2008 financial crisis has drained away most of the flexibility of our financial system and exhausted the political resources to mount a massive intervention to save the system as we did six years ago. War in Ukraine is the type of black swan event that could set the economic and financial dominos tumbling.

We might have expected the catalyst to come from any number of hot spots around the world: Iran, North Korea, China, choose a spot in the Middle East. Only two months ago, who’d have thought it could be Ukraine?

Ukraine is emblematic of the fragility that I believe will characterize the world for years to come. Gold will benefit in this environment.


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