Geopolitics Spark Flight to Safety and Gold
Gold Posts 10% Gains, 5-month High as Geopolitics Spark Flight to Safety and Gold
Developments in geopolitics spark flight to safety and gold by investors this week. Gold has posted 10% gains for the year now. It broke out Tuesday over $1,270, and by Wednesday, it had hit a 5-month high. It continued these gains through the end of the week.
U.S. airstrikes in Syria last week boosted the gold market’s rally this year, and this week prices climbed further as uncertainty levels increased. Silver also saw gains. The white metal hit a six-week high on global unrest, and continues to be an effective safe haven bet.
What this means for investors: Safe haven demand amidst global, geopolitical unrest is the key element driving this rally right now. Not only in Syria, but uncertainty around Brexit, European elections, and North Korea are making significant impact. Gold and silver are safety nets for wealth preservation during war and economic downturn. Because of the tangibility and universal value, it’s the investment of choice during uncertainty.
However geopolitical uncertainty is not the only factor impacting the markets. The dollar’s recent strength is finally faltering, which is boosting precious metals prices. Trade, interest rates, and the winding down of the Trump rally in the stock markets are also favoring gold demand right now.
White House Warnings to Syria and Russian Relations Increase Market Unrest
Escalation of hawkish rhetoric on Syria is at the root of heightened fear in the markets. Both Nikki Haley – U.S. ambassador to the U.N. – and President Trump said this week that more airstrikes are not out of the question. The U.S. also asserted that Russia (the chief ally of President Bashar al-Assad) knew of the alleged chemical attack by Assad’s forces on the rebel-held village last week. On the other hand, Russian foreign minister Sergey Lavrov strongly denied this, and questioned the U.S. motivation behind the strikes. Russia and Syrian ally Iran also ominously warned the U.S. of retaliation if “red lines are crossed again.”
Against this backdrop, Secretary of State Rex Tillerson met with his Russian counterpart and Vladimir Putin in Moscow this week. The two statesmen acknowledged that U.S. – Russian relations are currently “very weak.” The tension between the two states over Syria is too volatile right now. Russia also accused the U.S. of attempting to disrupt the peace talks that Russia is brokering in Astana, Kazakstan between the Syrian government and some of the rebels.
What this means for investors: In addition to gold hitting a 5-month high on safe haven demand, oil also rallied, while currencies (the dollar, ruble, euro, pound sterling) fell. It is worth recalling President Trump’s campaign promises to increase defense spending. Escalating military action in Syria and other parts of the Middle East would likely necessitate higher spending increases than initially anticipated. With government spending will come inflation, and gold could be in for an unprecedented run.
On Thursday the Dow plunged again when the U.S. dropped the largest non-nuclear bomb ever used in combat on an ISIS stronghold in Afghanistan. The markets are interpreting this as even further uncertainty and conflict ahead.
Trade with China and the North Korea Crisis
Last week President Trump met with Chinese President Xi about trade, currency manipulation, and the North Korea crisis. The talks seemed to have policy effects on both nations. Trump labeled China a “currency manipulator” on the campaign trail, and lambasted China recently on Twitter for not solving the North Korea crisis. China appeared to be readying its economy for the intense summit ahead of time based on Trump’s positions. The trade deficit also fell in February with fewer Chinese imports.
Trump admitted after the summit that the relationship between China and North Korea was much more complex than he had anticipated. Subsequently, the U.S.-China relationship seems to be strategically shifting. On the Chinese side, the People’s Liberation Army deployed 150,000 troops to the border with North Korea. The U.S., meanwhile, is sending ships towards the Korean coast, while North Korea purports to be preparing more ballistic missile tests.
What this means for investors: It is difficult to gauge the direction the U.S. – China relationship is going to take. There is an elaborate geopolitical theater happening between the two right now, and at the centerpiece is the rogue, unpredictable North Korea. Relations between the two superpowers heavily influence the markets. If Trump continues to pursue the protectionist trade policies he has been touting since the campaign, it will be to the detriment of China and economic growth. On the other hand, if he scales back his aggressive rhetoric in favor of compromise to secure Chinese assistance in halting North Korean nuclear expansion, volatility around military conflict could impact the markets. There is potential either way for safe haven demand to go up.
Trump Says Dollar Is Too Strong, Favors Low Interest Rate Policy
Not only did geopolitics spark flight to safety and gold this week, but comments from President Trump to the Wall Street Journal also helped spur the rally. Trump claimed that the dollar is too strong – in part due to over-confidence in him – and that it will be detrimental long term for growth. It is not the first time that he has made this claim. He also said this week that he favors a low interest rate policy. With the Fed promising a couple more rate hikes this year, this could lead to clashes between the central bank and White House.
What this means for investors: A weaker dollar will break some of the resistance gold prices have been experiencing. Likewise, lower interest rates benefit gold in general and could help rein in the greenback. Analysts are also saying that the “Trump Rally” in the stock markets could be on its last legs. These are all economic conditions in which gold and silver could rally for a while.
Subscribe Now to Get the Gold Market Discussion Delivered Direct to Your Inbox
Here are some articles from the web discussing the topics in this week’s post:
Gold Posts 10% Gains, 5-month High as Geopolitics Spark Flight to Safety and Gold
White House Warnings to Syria and Russian Relations Increase Market Unrest
Trade with China and North Korea
Trump Says Dollar Is Too Strong, Favors Low Interest Rate Policy
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.
