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Gold Trending up as Ongoing Geopolitical Tensions Increase

Since the article posted a couple of weeks ago discussing the continuing impact of tariffs on the economy and Gold, the Dollar price has risen over 5.6%, from $1280 to nearly $1400.  While little has changed economically that would alter the direction of current trends, it seems that much is happening geopolitically to push things further in the same direction.  One of the drivers of the cost of Gold, and many other items for that matter, is the price of oil.  While there is some speculation that oil could spike to over $80 per barrel due to possible conflict with Iran, it is hopeful that such conflict can be avoided.  A more likely scenario is that oil has probably already bottomed for the year, and will stay in a trading range +/-$20 of the current price.  When oil drops below $50 per barrel, there is usually pressure from somewhere (some say “manufactured pressure”) to raise it back up again, in order to help keep the banks afloat.  This is not merely a recent phenomenon tied to fracking, but has been important to bank health for many years.

Oil, Gold, Real Estate

When there is an informal or unwritten floor on the price of oil, there is essentially a floor on the price of every commodity that depends on oil to be mined or harvested.  If the low for oil is in for the year (and I believe it is), then it follows that the low is likely in for Gold, Silver, and many other commodities and agricultural products.  The same cannot be said however for the equity markets and commercial real estate.  With an ongoing bout of retail store closures around the country, it seems a rout is likely to begin for both property owners and the stockholders of the affected companies.  Stores close when items are not selling, which affects property owners.  When stores close, future items have no hope of selling, which affects share prices.   So while the pressure on Gold and Silver this year has been mostly upward, the pressure surrounding equities, real estate, and certain sectors of the corporate bond market has been largely downward.

Interest Rate Trends Changing

This is evidenced by the sudden change of heart exhibited by the Federal Reserve, who have recently expressed the desire to possibly lower interest rates after insisting they would be raised 3-4 more times.  As we mentioned earlier, the case for negative interest rates in the United States has also been considered seriously, with new methods available to help impose negative interest rates on holders of cash.  Such drastic measures are not being considered to help Gold and Silver prices, who have been able to defend and speak for themselves for over 5,000 years.  But all is being done to try and support the existing financial system, which has been aptly described as a financial “house of cards” that hopes the wind doesn’t blow too hard.  But winds of difficulty seem to be picking up, on a worldwide scale.

War Drums Beating Loudly

While some in the current administration are proposing war with Iran due to a second set of oil tankers being attacked in the Middle East, not everyone is convinced these events are not the tail wagging the dog.  While Iran has been blamed, they vehemently deny the accusations, and have challenged the report by demanding evidence.  The evidence offered by the United States (video footage purported to be Iranians laying out mines) has been disputed by those on board one of the ships that was attacked, who claim that flying objects struck their ship.  The United States has talked about going to war with Iran for many years, but hasn’t been able to come up with concrete reasons that would sway public opinion enough to move forward.  As early as 2002, then President George W. Bush identified Iran as being part of an “Axis of Evil”, that must be dealt with in the world.

It is not unprecedented for the United States to use the claim of “video footage”, to describe why certain attacks have taken place.  We are all familiar with the unfortunate circumstances surrounding the deaths of Americans serving the American embassy in Benghazi Libya back in 2012.  It was initially claimed that these attacks were due to unrelated video footage produced in California.  Such claims were later shown to be ridiculous, and part of a subversive plot to silence (by death) those in Libya who were familiar with a gun running operation between Libya and Syria.

While we can all hope the United States would not again resort to using unrelated video footage to explain/justify a military attack, the possibility exists.  But regardless of the veracity of this reported video footage, or of the reason for burning oil tankers, the events of today point to greater economic uncertainty in the days ahead.  If we assume Iran blew up these oil tankers as the Secretary of State would have us believe, then probable military action against Iran is up ahead.  If we assume that Iran is innocent of these attacks, but the powers that be want a war with Iran anyway, then possible military action against Iran is up ahead.  Some believe that war results when there is no apparent way to fix a crumbling financial system (WW II after the Great Depression, for example).

As mentioned in the first paragraph, hopefully conflict with Iran will be avoided.  Because conflict between the US and Iran could quickly evolve into worldwide conflict, between those who have continued to trade with Iran vs those who have cooperated with American sanctions on Iran.  The loss of life and immense human suffering that war brings is sometimes catastrophic. Such a conflict would also further erode the dominance of the US Dollar in world trade and as a reserve currency, thereby reducing the purchasing power of every Dollar in an American purse, wallet, or savings account.  While not as catastrophic as loosing a loved one in battle, the economic effects would be felt by many far removed from the violence.

Gold and Silver, A Safe Place

There is a reason central banks around the world have been buying Gold, and selling Dollars.  There is a reason the United States continues to hold most of it’s financial reserves in Gold.  And there is a reason why those who own Gold and Silver have seen the value of their holdings increase by $640,000,000,000.00 just in the last year alone.  That reason is not going away.  The reasons why we should all protect ourselves are not going away.  Rather, they are multiplying.