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October
17
2023

The Only Asset People Want During War
Peter Reagan

Two wars: good for gold, bad for everything else

News of the surprise Hamas attacks on Israeli civilians rocked the world. The subsequent safe-haven demand sent gold prices rising 6%, nearing March highs and above the previous week’s lows. (Please note I don’t mean to be callous; I mourn the innocent lives lost on both sides of the conflict. However this simply isn’t the appropriate forum for airing my opinion on the geopolitical decisions that led to this war.)

This is a well-established precedent: Military conflicts drive safe-haven investment prices up. Battles that break out in the Middle East can have massive effects on the global economy. Oil prices for one, ocean freight for another – and the region is notoriously unstable. No one really expects an attack on Israel not to draw in other regional powers, directly or indirectly. Iran, Syria and Iraq are notorious for using non-state proxy groups to advance their agendas.

Globally, we find ourselves in what feels like an unprecedented situation. Not one, but two shooting wars involving regional powers. With unknown consequences. And capital hates uncertainty…

As Kitco notes, the U.S. announced a crackdown on Russian sanction-dodging, and oil prices immediately surged. War-fueled inflation is likely to get worse…

The connection to the Middle Eastern conflict might not be apparent. But let’s consider: If you had to choose, what was the biggest factor driving gold prices in the last few years? The pandemic panic and lockdowns, surely?

Actually the Russian invasion of Ukraine has driven gold’s price over the last 18 months. Considering the global economic impacts of the pandemic lockdowns, it’s clear how military conflict influences gold. (Learn more about gold in wartime here.)

Consider also that BRICS nations are heavily tied to Middle Eastern economic partnerships. Should this saga unravel as viciously as that of Russia-Ukraine, are we to see some kind of anti-Western BRICS protectionism that will further impact the U.S. economy, but also that of Europe?

Frank Holmes points out that gold didn’t climb in the 1970s on the back of a historic hiking cycle alone. The Yom Kippur War was a similar conflict in 1973, a sneak attack on a holiday from Egyptian and Syrian forces. This directly caused the first of two major oil crises of the 1970s. Then, as now, war disrupted the global economy – and we know how that turned out back then.

Are we facing another “lost decade” reminiscent of the 1970s? It’s more than possible. I doubt we’ve seen the full impacts on gold’s price, either. All we’ve seen so far is the beginning.

Analyst sees gold above $2,400 on sentiment alone

Avi Gilburt presents an interesting analysis where he essentially dismisses all factors in the gold market other than sentiment. Now, to be clear, we’ve always pointed out how important sentiment is in the gold market, sometimes rationally and sometimes irrationally. It’s not without reason that Frank Holmes dubs gold investment the “fear and love” trade.

But Gilburt goes a step further, shoving aside rate hikes and even inflation to focus solely on sentiment. He tells us of his accurate forecasts on gold in the past, but don’t we all have a few of those?

What’s most interesting about Gilburt’s analysis is that it’s mostly an attack on $5,000 price targets for gold in the near-term. He argues that $2,100 and then $2,400 levels are the more reasonable near-term expectations. That leaves the window open for gold to capture $5,000 later. But he bases his bullish forecast, which takes into account the cyclical nature of all markets, on sentiment alone.

That makes sense because fundamentals are stacked in gold’s favor. As soon as we consider factors other than sentiment and their effects on gold’s price, we have to concur that it’s likely to exceed Gilburt’s forecasts.

Nonetheless, gold investors should be satisfied that even a bare-bones, sentiment-driven case for gold still has it hitting $2,400 in the near-term.

In Switzerland, post offices are gold hubs

This overview of Switzerland’s gold holdings places it third on the list of the largest gold-owning nations, even though its central bank only has a “paltry” 1,040 tons. In absolute terms, they lag far behind such national gold-reserve heavyweights as Germany (3,353 tons) or China (2,113 tons officially), but also nations that are barely mentioned like Italy (2,452 tons) and France (2,437 tons).

It’s the overlooked Swiss consumer gold hoard that more than compensates for the nation’s relatively low official gold reserve. Switzerland has a per-capita gold demand of 5.58 grams annually –the highest of any nation. Here are the top gold-buying nations, for comparison:

Data via World Gold Council

Now, there’s a lot to think about here – which I’ll save for a subsequent article. For now, let’s focus on the rather obvious (and unexpected) data point.

The Swiss are by far the most enthusiastic gold-owning nation. Attesting to this is the latest scheme involving Switzerland’s post office, which has partnered with European gold seller Philoro to sell gold directly to citizensin physical offices as well as online.

It doesn’t stop there! Seven cities in Switzerland now also have the local post office serve as a pawn shop:

Antique gold, such as rings, necklaces, and brooches, can be handed in for purchase at selected post offices. The jewelry is then delivered to Philoro and evaluated using X-ray fluorescence analysis. This precise analysis measures all precious metals, including silver, platinum, and palladium.

Now, we’re all about offering everyday American families the opportunity to diversify their savings with physical gold. We do our best to make it easy. But can you imagine going into the post office and walking out with a book of stamps and a handful of Valcambi Combibars? Our own U.S. Mint doesn’t even sell bullion direct to individuals.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

 

 

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