The conflict between Russia and Ukraine has added much uncertainly to the already bearish market amidst rising inflation and the general tightening of global monetary policy. As a millennial investor, this is the first time that I am investing through an armed conflict and I do hope that this may be my last as nothing is worth the loss of human lives.
While this current conflict does bring about many new and unique variables, in this article, I will be focusing on 3 historical economic themes which has caused widespread discussion/debate throughout all major conflicts in our time.
1. Inflation
Inflation can be explained as the “sustained upward movement in the overall price level of goods and services in an economy“. While a moderate amount of controlled inflation helps drive economic growth, it has been consistent throughout history that inflation rises much fast during times of conflict. This is because conflicts often cause a shortage of goods and services as well as an increase in demand for raw materials. If we apply this to the basic theory of demand and supply, we know that prices increase when,
- Demand outpaces supply – eg: More metal needed for equipment/ammo, more fuel needed for militaty vehicles etc.
- Decrease supply with consistent/increased demand – eg: Same amount of food supply is needed while farms destroyed/factories destroyed
We can see from both diagrams that in times of conflict, inflation surged but subsequently subsided after. This is an important point to consider for observers who watch inflation rates closely.
In my opinion, we are likely to experience similar rate of inflation across the board. However one area where we may face more inflation would be in food as we see many major food products shutting their operations in Ukraine since the start of the crisis.
2. Commodities
Commodities are an important aspect of most American’s daily life. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Traditional examples of commodities include grains, gold, beef, oil, and natural gas.
Investopedia
Throughout history, the cost of commodities went up during times of war. This is largely due to the increase in the demand of oil during times of conflict. This has already happened at present with oil surging past $100 for the first time since 2014.
Present-day supply chain shortages (prior to the conflict) have already added much stress on the prices of commodities. I’ve briefly summarised the landscape:
- Prior to this conflict, the world was already experiencing supply chain shortages.
- Europe is reliant on Russia for energy and gases which are used in the production of fertilisers. Hence any price increase in gas will snowball into other sectors.
- Russia and Ukraine together account for more than a quarter of global wheat exports, while Ukraine alone makes up almost half of the exports of sunflower oil. – Should there be any hinderance to this, prices of both wheat and sunflower oil may fluctuate.
- Ukraine is somewhat of a gateway given its geographical location. Should there be disruptions to rail (which there already are), this may put a further strain on transport/freight costs.
- Ultimately, the 5 commodities which will be disrupted the most include energy, food, transport, metals & microchips.
It can be difficult to invest in commodities, but here’re the Best Commodity ETFs you can start with.
3. Gold
Historically, the price of gold has always gone up during times of conflict. This has caused many investors to consider gold to be a hedge during times of extreme volatility. Even at present, we see the price of gold hit its all-time high just days ago.
When we look at the value of gold, some argue that it has no intrinsic value whereas the general consensus is that “Gold’s value is ultimately a social construction: it is valuable because we all agree it has been and will be in the future”.
In my personal opinion, I believe that the value of gold is very much tied into the qualities of Ideal Money Material which may be the reason why it commands the value that it does in good times and bad.
And if you’re wondering, here’s how to buy Gold in Singapore (6 ways).
Concluding thoughts
The overlying theme that we should consider at the very onset is that the S&P 500 continues to rally despite every major geopolitical conflict or war. Though certain conflicts caused larger corrections than others, ultimately the S&P 500 continued its rally right up to this day.
As this overlying theme may be seen as somewhat insensitive in nature I shall leave this topic to speak for itself with just the diagrams below.
