Lawrie Williams

Gold should be part of every investor’s portfolio to protect against the host of geopolitical disaster scenarios that are looming on the horizon.

“Over the long haul, gold is the least risky and potentially most rewarding of all investment asset classes.”  So says New York-based specialist gold analyst, Jeff Nichols, in his latest Nicholsongold newsletter.  Admittedly Nichols falls into the gold bull camp, but is at the realistic end of gold analysis, seeing both potential upsides and downsides ahead.  His latest article is headed Gold: Now is the time, and in it he lays out the various factors which he sees as having the potential to drive the gold price in the medium to long term – and as noted in the first sentence of this article he sees a reasonable investment in physical gold (not gold derivatives) – perhaps 5% - 10% of an investment portfolio – as key to protecting one’s assets over time.

So what factors does he point to as being the likely positive points for investment in gold?  In truth he is primarily stating the obvious here, but it’s an ‘obvious’ which is often ignored by mainstream investors who seek more rapid returns than gold tends to offer.  But rapid returns are themselves risky – it’s all very well chasing the stock markets upwards but as investors have found to their cost, bull markets tend to be followed by a crash and investors are notoriously bad at recognising when a crash begins and by the time they try to take their profits it is usually too late.

But some of the factors which could very easily come into play could have both an adverse impact on the general stock markets and a positive impact on gold.

Primarily there are a significant geopolitical tensions which could easily escalate into something which is far more threatening.  Americans in particular tend to see these geopolitical risks as all being far away geographically and not having an impact on their domestic security – and it is America which is currently controlling the gold price, although with China exerting more and more influence on gold as time progresses this could well change.  While it might suit China to see the gold price stay at or around current levels as it, as most now believe, is building its own gold reserves on the cheap, it, and its citizens, now have such a vested interest in gold that it is unlikely to let the price drop much, if at all, below its current trading range.  We do seem to have been seeing a pattern here – the U.S. market appears to be intervening to prevent the gold price moving above the $1220 level, while Asian buying seems to be preventing it falling below $1180 with the $1200 mark being something of a happy medium.

But let’s look specifically at the geopolitical tensions. Most of which could have a strong impact on the global economy – and in this modern day and age the U.S. economic system cannot be immune to be being severely damaged by major economic difficulties in other parts of the world.

The Greek crisis continues to play out with neither side apparently willing to give ground.  The country’s Syriza political party, currently in government, came to office on a pledge to end ‘austerity’ – the current dirty word in European politics.  It can’t afford to back down on this and retain any domestic credibility.  Meanwhile the European Central Bank and the IMF are also unwilling to give ground on mitigating Greek debt and while the number of occasions Greece has appeared to be on the abyss of default are seemingly legion, this time around it cannot avoid this unless one side or the other gives up substantial ground.  Now maybe some kind of compromise will be reached – the economic aftermath of a Greek default could be devastating for some of the European banks which would likely have even more of an impact than the 2008 Lehmann Brothers collapse which precipitated the Global Financial Crisis of that year.  The U.S. markets would not be immune and could crash again accordingly – and the European markets even more so.  This next phase will play out this month.  We shall have to wait and see what materialises.

ISIS/ISIL continues to gain ground in the Middle East major oil producing region with huge swathes of Syria and Iraq falling under its draconian fundamentalist Islamic control.  This is potentially an enormously destabilising influence across the whole of the Middle East and parts of North Africa, and could spread much further afield into other Islamic religion-dominated areas in Asia and Eastern Europe.  While westerners cannot understand the appeal of a fundamentalist Islamic state and ‘jihad’, the principle obviously has a huge impact on religiously manipulated young Moslems in many other countries who may feel disenfranchised by their current domestic political systems.  9/11 demonstrated that even the U.S. is not completely immune to potentially economically destabilising terrorist attacks.

Ukraine continues to simmer.  Russia will not give Crimea back and will also probably not let the ethnic Russians in the country’s east be subsumed by what it sees as a fascist Ukraine  government intent on linking with Europe and wanting NATO to come in and ‘protect’ it.  Sanctions imposed on Russia seem to be hurting the Europeans at the sharp end as much as Russia itself, if not more so, while President Putin is increasing his trade links with former Soviet Union independent nations and with China forming an enormous economic bloc to rival U.S. global economic hegemony.  This may also lead to a major economic conflict which could strongly impact the currently U.S.-dominated global financial system.

And last, but certainly not least, is the overall role of China which is keen to take what it sees as its rightful place in the global economic hierarchy – a process which it feels the U.S. is trying to block through its effective voting domination of the IMF.  With its enormous foreign exchange reserves mostly held in U.S. treasuries, China is in a position to seriously damage the U.S. financial system should it wish to do so.  It is believed to be building huge gold reserves and taking moves to dominate global gold trading and pricing.  With gold price strength being seen as U.S. dollar weakness the Chinese could have another economic weapon to hand.  It might be wise for the U.S. not to tweak the dragon’s tail any further – and the possible South China Sea interventions by the U.S. might be seen as a step too far by the Chinese which see what happens there as none of America’s business.

Nichols does, however, point out in his article that any of these factors, and probably some other black swans out there, could initially trigger a swift tumble not only in equities, but also in the price of gold itself as some retail and institutional investors have to raise cash to cover losses in equity and other financial markets. We saw this in the 2008 financial crash, but gold was quickest to recover of all asset classes.   But Nichols goes on to say that any such retreat in the metal’s price should be seen as an opportunity for savvy investors to acquire more gold at bargain prices.