Introduction
Anticipating and measuring the impacts of geopolitical events is vital in the 21st century. Globalization and interdependence have made this even more important. Political tensions, conflicts, sanctions, and other geopolitical events can influence commodity prices.
In this paper, we will examine the different factors that come into play when considering how geopolitical events can affect prices for commodities such as oil and gold. We will also explain how investors can use these insights to make informed decisions about investments in commodities.
We will explore how governments respond to these events. Such as using supply and demand management or creating strategic reserves to stabilize commodity prices. Lastly, we will look at potential methods investors can use to protect themselves from short-term shocks caused by geopolitical events affecting commodity prices.
The Impact of Geopolitical Events on Commodity Prices
Today’s world is interconnected. Geopolitical events can have a big effect on commodity prices. Natural disasters, political issues and economic issues can all cause supply and demand changes.
This article will examine how geopolitical events can affect the prices of commodities worldwide.
Political Instability
Political instability affects the world economy. Unstable regimes can lead to government interventions. Civil unrest causes currency fluctuations.
Economic sanctions due to unrest can cause commodities to be overcrowded or undersupplied. This leads to increased demand and changing supplies.
Investors become nervous in an uncertain political environment. They reduce investment, decreasing liquidity and demand for commodities.
Not all commodities are affected the same by geopolitical scenarios. Research is needed to understand the trends.
Trade Wars
Trade wars, tariffs, and sanctions are now common tactics used by countries to gain a competitive edge in the global economy. Though they can help achieve domestic goals, their impacts on commodity markets are often unclear.
These strategies disrupt supply chains, leading to price hikes for consumers as demand remains despite limited supply. Tariffs also make international trade of commodities more expensive, decreasing supply and elevating prices due to increased competition between buyers and speculation.
Economic sanctions imposed on other countries can cause currency level fluctuations and shortages as production materials or labor are restricted or denied due to trading partners.
Those in commodity markets must be aware of geopolitical events that may affect buying or selling prices for commodities, including international demands, industry and economic performances, and other factors. This knowledge helps them stay informed and protect their profits from trades involving raw materials and minerals.
Sanctions
Sanctions are restrictions put on a country or individual to reach a foreign policy goal. These may involve denying goods, access to markets, or investment licenses.
When sanctions are imposed, the prices of commodities from that region can rise. Trade with certain countries is restricted, so firms and importers can’t purchase from their usual suppliers, which affects supply chains and increases uncertainty. This raises prices by reducing the available goods for trade.
In addition, tight currency controls cause a demand for alternative forms of payment, such as gold and cryptocurrencies. These become geopolitical hedges to counter currency volatility, causing their prices to go up in times of economic instability due to sanctions.
Inside the country, more sanctions lead to more expensive imports. This causes a shift in diets, changing the demand-supply balance of commodities and making prices fluctuate. Eventually, increased import costs due to sanctions raise prices of both imported and domestically produced goods, eroding the households’ purchasing power.
Currency Fluctuations
Currency changes have a big impact on the price of commodities. Exchange rate shifts may cause market chaos, especially for those trading items worldwide. For example, if costs are in US dollars, a weakening of the dollar would lead to higher import costs. On the other hand, a stronger dollar reduces imported goods costs.
In addition, a weaker dollar lowers export costs, while a stronger dollar raises them. Due to this relationship, there is uncertainty about short-term commodity price movements. However, it also offers long-term trading opportunities to investors who study and watch currency movements.
Furthermore, geopolitical events that affect currency relationships need to be closely monitored to predict how they will influence fluctuating commodity prices.
Examples of Geopolitical Events Impacting Commodity Prices
Geopolitical events influence commodity prices. They can alter production, transport, and demand. Examples of geopolitical events are trade arguments, oil bans, and currency value drops.
In this article, we explore examples of geopolitical events impacting commodity costs.
The US-China Trade War
The US and China’s trade war has caused chaos in global markets. Tariffs set by both countries have hugely impacted international trade and markets. Because of the unstable demand from China and US, commodity prices have gone up and down.
American sectors like agriculture and manufacturing need Chinese imports, so US suppliers are influenced by market access, investment costs, and cost structure. In response, China put tariffs on US products, causing US production costs to rise and profits to drop for companies which rely on Chinese supplies or make goods with Chinese materials.
As US-China talks are still undecided, more volatility in the prices of commodities for affected markets is expected.
Brexit
Brexit is the name for the UK leaving the EU. On 23 June 2016, it was declared that the majority of people in the UK wanted to leave. It caused economic and political shockwaves throughout Europe and beyond.
In the short-term, markets were alarmed. Commodity prices such as oil dropped, due to worries about future demand.
The long-term effects are still unclear. But, it’s certain that Britain’s departure will change the global trading environment. Prices may not stay low forever, so people must watch out for events like Brexit.
US Sanctions on Iran
The US imposed sanctions on Iran in 2018 to reduce Tehran’s nuclear and ballistic missile programs. These sanctions restricted US investment in Iranian oil imports, causing oil prices to soar globally. Shipping was also disrupted as some of Iran’s largest cargo carriers dropped out due to new restrictions. This caused an additional bottleneck, resulting in higher shipping costs.
The political situation in Iran caused uncertainty and deterred investors, leading to reduced demand and a drop in commodity prices.
Conclusion
Geopolitical events have a huge influence on commodity prices as they cause fear in markets. Disruptions in supply, like natural disasters, sanctions and currency devaluation, are key elements of the commodity market. Plus, the growing world population has put pressure on resources and altered the supply-demand pricing model.
Before investing, investors should look into the current market conditions. They should understand how geopolitical events can affect prices in different markets. Also, they should be on the lookout for news stories that may affect certain commodities and be prepared for changes. It’s essential to monitor all geopolitical events worldwide. If something could disrupt or drive commodity prices, investigate it to make wise decisions about investments.
