Gold reacting to global flash points

2020.01.09 

Gold’s safe haven status was tested this week, as Iran countered the assassination of its top military commander with missile strikes against two Iraqi bases housing US troops.

On Tuesday night Tehran fired over a dozen missiles at the Al-Asad airbase and Erbil airport, in obvious retaliation against an American drone strike a few days earlier that killed General Qassem Soleimani.

The country’s foreign minister, Javad Sarif, took to Twitter to announce the attack, writing that “Iran took & concluded proportionate measures in self-defense under Article 51 of the UN Charter targeting base from which cowardly armed attack against our citizens & senior officials were launched. We do not see escalation or war, but will defend ourselves against any aggression.” 

Satellite photos run by news outlet NPR showed damage to at least five structures at Al-Asad but no casualties – despite Iranian claims to have killed dozens. Supreme Leader Ali Khameini apparently called the missile strike a “slap” to the Americans but said Iran’s real revenge will be forcing the US to pull out of the region, CBS News said. 

Gold futures jumped to a six-year high of $1,613.30 an ounce, as fear and uncertainty over what comes next had investors piling into the precious metal. However by Wednesday morning prices had softened, especially after US President Donald Trump signaled no further US aggression would be forthcoming. 

At time of writing spot gold was trading down, at $1,554.10 an ounce, and gold for February delivery (gold futures) had sunk about $17 to $1,556.80/oz. 

“Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world,” Trump said in a televised address to the nation, Wednesday. 

War and gold

As we all know gold tends to do well in times of economic or political uncertainty, as well as verbal threats, or movements that could signal civil unrest or war. Market Realist published a good chart showing the effects of recent wars on the gold price going back 42 years to the 1978 Iranian revolution. The chart shows gold prices rising 23% in 1977, 37% in 1978 during the revolution, and 126% in 1979, a tumultuous year that included the Iranian hostage crisis, the Iran-Iraq war, and the Soviet invasion of Afghanistan. 

The threat of war casts a pall of economic uncertainty, causing stock markets to dip. History however tells us that while gold usually jumps in the run-up to a war, it soon returns to levels before it started to climb, especially if the threats are hollow. If military action does result, the gold price usually softens after it becomes clear the conflict is unlikely to last long (such as the US invasion of Iraq in 2003) or once the war is over – as was the case after the end of the first Gulf War in 1991.

The World Trade Center and Pentagon attacks of 9/11, and last year’s strike on Saudi Aramco’s Abquaiq oil processing plant, also saw gold prices initially jump, then settle into a more regular trading pattern. 

And while war is obviously bad for stock markets, as traders price in the potential damage to infrastructure and a country’s short-term economic viability, which might cost billions, the markets are also quick to react to positive news. 

Trump’s apparent wish to avoid further conflict with Iran buoyed investor sentiment, Wednesday. US stocks recovered from overnight losses, with the S&P and the Nasdaq setting fresh intra-day trading records.

Gold investors love nothing more than a war, economic crisis or any type of geopolitical instability to grow the value of their bullion. Heightened tensions, terrorist attacks, border skirmishes or civil unrest scare investors into putting their funds into safe havens like gold and stable sovereign debt like US Treasuries. 

The headlines this week have been full of escalations and continuing conflicts around the world. Here is a rundown. 

Syria 

The Trump administration’s decision to pull troops out of northern Syria gave Turkey a green light to attack the Kurds, who with US backing, are fighting Islamic State. Turkey immediately mounted a strike against Kurdish forces, prompting bipartisan accusations that Trump betrayed the US ally. Senator Lindsey Graham, normally a vocal Trump supporter, called the pullout the biggest mistake of Trump’s presidency. And now ISIS, who President Trump said was defeated, is back in the news, rejuvenated.

A Pentagon report states that the US troop withdrawal gave ISIS “time and space” to target the West.

“ISIS exploited the Turkish incursion and subsequent drawdown of U.S. troops to reconstitute capabilities and resources within Syria and strengthen its ability to plan attacks abroad,” the Pentagon’s inspector general said in the report, quoted in November by USA Today. Russian troops also moved into the region. 

Trump is going to have a lot of blood on his hands from this, a second Republican double cross of the Kurds.

Indeed it seems to us, at AOTH, that any time Trump meddles in international affairs regarding America’s allies, Russia come out ahead. That was proven again this week when Russian President Vladimir Putin made a surprise visit to Syria, a key ally of both Russia and Iran. 

According to a report in Al-Jazeera, Putin met his Syrian counterpart, President Bashar al-Assad, in Damascus, to hear a military presentation by the commander of Russian forces in Syria. 

It’s no coincidence that Putin’s visit to Syria, only his second since Russian troops joined the war in 2015, comes amid US-Iran tensions in the region. General Soleimani, commander of Iran’s elite external military Quds Force, was considered the architect of Iran’s support for the Syrian army. He was also thought to be an indispensable figure in the fight against the Taliban and ISIS – even working together with the United States to defeat the terrorist group, as when Iran and American-backed forces lifted ISIS’s 2014 siege of Amirli, a predominantly Shi’ite Turkmen town in Iraq. 

With the Iraqi parliament voting to expel US forces from Iraq, and the US army’s presence significantly lessened in Syria, Putin and his Russian army are more than happy to step into the power vacuum created by US troop withdrawals. 

Not to mention the fact that the catalyst for all the US-Iran tension, Trump’s decision to abandon the nuclear deal agreed to by six powers including President Obama, has had the opposite effect his administration hoped – a continuation of Iran’s nuclear program. 

While Trump began his speech on Wednesday vowing “As long as I am president of the United States, Iran will never be allowed to have a nuclear weapon,” Iran said earlier this week that it will no longer abide by any restrictions imposed by the 2015 deal, including limitations on enriching uranium. A CNN arms control expert said that Iran, with a no limit all out effort could have a nuclear weapon in a year. Has Trump walked away from a nuclear arms deal the global community made with Iran, that was verifiable and enforceable, to give us a new nuclear power? I personally do not feel the world is a safer place, Iran has already said they will not enter a new nuclear deal.

Turkey

Turkey’s unilateral decision to invade Syria put the NATO ally on a collision course with its European neighbors. After the Turkish army in October mounted an assault against Kurdish YPG militia, Germany, France and the UK banned arms exports to Turkey, that could be used by its military in Syria. 

The United States has also been extremely frustrated with Turkey, not only for its assault on the Kurds, but also by Turkey’s purchase of Russia’s S-400 missile defense system, which prompted the US to cancel delivery of its F-35 stealth fighter jet. 

In October Congress threatened to impose sanctions, and in December the Senate submitted a sanctions package to President Trump. The House of Representatives also, as DW reported, passed a resolution to recognize the mass murder and displacement of Armenians at the end of the Ottoman Empire as genocide. 

Should US sanctions kick in, Turkish President Erdogan has threatened to close down an air base where US troops are stationed, and the Kurecik Radar Station used by NATO. 

Just like in Syria, where Assad is cozying up to Putin, Western sanctions against Turkey might be driving Turkey out of NATO into Russia’s arms. 

As an emblem of Turkish-Russian cooperation, consider that this week, Russia officially opened its TurkStream natural gas pipeline. As Bloomberg reported, Putin and Erdogan met in Istanbul to inaugurate the pipeline that will carry Russian gas under the Black Sea to Turkey and supply several other countries in southeastern Europe. 

The move appears to thwart US attempts to prevent such cooperation. As Bloomberg notes, the opening of the pipeline comes just as US sanctions stall another Gazprom PJSC export line.  

Libya 

After the death of Muammar Gaddafi in a popular uprising, Libya became nearly un-governable, as rival militias vied for power while Islamic State gained influence in the North African nation. Barack Obama reportedly said the lack of planning for the aftermath of Gaddafi’s ouster was the worst mistake of his presidency. 

Nine years later, the UN-backed Libyan government is fighting an insurgency led by General Khalifa Haftar, based in eastern Libya. As the BBC reports, rebel forces have been trying to capture Tripoli, and have been blamed for an air strike last Saturday on a military academy that killed at least 30. The group denies involvement. 

In response, the Turkish parliament approved a bill deploying troops to help the Libyan government. In a joint statement, Israel, Greece and Cyprus warned against the military action, calling it a breach of a UN arms embargo imposed on Libya, and a threat to regional stability. Trump reportedly told Erdogan in a phone call that “foreign interference is complicating the situation in Libya.”

Arms buildup

As the Middle East continues to roil – with US interests historically and presently tied to the region’s oil wealth – an arms race is quietly building between the United States, Russia and China. 

President Trump kicked off this race to develop intermediate-range nuclear weapons by announcing in February his intention of leaving the 1987 INF Treaty within six months. The decision to exit the treaty was based on Russia violating the treaty’s terms by developing a banned weapon.  

Weeks after its formal withdrawal in August, the US tested a nuclear-capable Tomahawk cruise missile, prompting howls of outrage by Russia and China.

“We counsel the US side to abandon their outdated concepts of a cold war mentality and zero sum games, and exercise restraint in developing weapons,” a spokesman for China’s foreign ministry told a news briefing. 

With the INF Treaty toast, that leaves just one other nuclear arms agreement intact, the New START treaty limiting Russian and US nuclear warheads to 1,550 apiece.

However, START is unlikely to be extended when it expires in February 2021, according to John Bolton, Trump’s former national security advisor, quoted in The Guardian. The newspaper explained that Trump wants to negotiate a new arms control agreement that includes China. 

Imagine what no restrictions on the development of all ranges of nuclear weapons could mean to nuclear wannabe Iran, to China and North Korea – both eager to demonstrate the strengths of their budding militaries – and to the rest of the world’s nuclear-armed states, which in 2019 possessed a combined total of 14,000 nuclear warheads. 

North Korea

Up to the February 2018 Olympics in South Korea, Trump and North Korea’s Kim Jong-un exchanged a series of very public threats and personal insults after the reclusive nation successfully tested its first intercontinental ballistic missile capable of hitting the US mainland.

Three subsequent face to face meetings between Trump and Kim held much promise of peace, but delivered little. The 2018 Singapore summit saw Kim agreeing to pursue de-nuclearization, but without any hard targets or deadlines. A 2019 meeting in Hanoi was cut short after Kim insisted the US lift all economic sanctions in exchange for a partial dismantling of his nuclear arsenal. 

Even Trump’s visit to the demilitarized zone between South and North Korea failed to bear any diplomatic fruit. Thus we saw the North resume its missile testing program. Last May the regime was caught testing a short-range ballistic missile in violation of UN resolutions, and in December it conducted what US officials said was an “engine test”, thought to involve an engine that could launch a satellite or a long-range missile. 

Kim also stepped up his nuclear rhetoric, warning that the Trump administration was running out of time to salvage nuclear negotiations, and daring the US choose what “Christmas gift” it gets from the North. 

In the wake of the Soleimani assassination, many wonder how North Korea will react, especially considering President George W. Bush’s post-9/11 speech where he included the DPRK as part of an “Axis of Evil” alongside Iran and Iraq. 

One line of thinking has the North Korean leadership putting even more emphasis on its nuclear program, as a deterrent against a more aggressive United States under Trump. The regime may also believe that if the White House can take out an influential military figure like Soleimani, its own people might be next. All the more reason to hang on tightly to its nukes. 

As CNN reported this week, Pyongyang has pointed to leaders like Hussein and Moammar Gadhafi of Libya as telling examples of why it needs nuclear weapons, and why it is so hesitant to give them up in negotiations. Gadhafi agreed to abandon his nuclear ambitions in exchange for sanctions relief in the early 2000s. Within years, he was overthrown and killed by rebels backed by Washington.

Gold-silver ratio

Amid all of these global hot spots, and we haven’t even mentioned Hong Kong, the US constantly poking the Chinese dragon in terms of trade tariffs and shows of force in the South China Sea and Taiwan Strait, Brexit, the pending Senate vote to impeach Trump, gold, the ultimate safe haven in times of crisis, continues to shine – as well as its sister metal, silver. 

Here it’s interesting not only to look at how gold and silver are doing when cold and luke-warm conflicts turn hot, but also the ratio between the two. 

We can use the gold-silver ratio to find out how silver prices compare to gold, since the precious metals have roughly the same amount of above-ground supply – 6.1 billion ounces, and around the same level of 0.999 fine bullion used for investments – 2.5Boz.

The gold-silver ratio is the amount of silver one can buy with an ounce of gold. Simply divide the current gold price by the price of silver, to find the ratio.

On June 12, the gold-silver ratio hit a 26-year high by breaking through the 90-ounce mark – meaning it took over 90 ounces of silver to purchase one ounce of gold. The higher the number, the more undervalued is silver or, to put it another way, the farther gold is pulling away from silver, valued in dollars per ounce.

At the current ratio of 86:1, which is far out of whack from the historical ratio of 54:1, silver is on sale. The question precious metals investors need to ask themselves is, with the world having become a much more dangerous place in the last few weeks, will gold move down to adjust to a more normal ratio, or will silver prices head up, to re-calibrate the ratio? If I was a betting man, I’d put my money on a 2020 run on silver. 

As we wrote in Hi-yo Silver Away! silver is expected to do well in 2020 through a combination of higher industrial and investment demand, and tightened supply owing to mine production issues and output cuts. 

The main factors that will determine silver’s fate, are whether or not there is a full resolution to the US-China trade war (a complete deal, to follow the recent phase-one agreement, would be bullish for the world economy, and boost demand for all metals including silver); global growth prospects, particularly in sickly Europe; the relative strength of the US dollar; bond yields; and whether central banks continue to keep a firm lid on interest rates. 

Conclusion

This article contains example after example of failed US foreign policy. Not only under Trump, but Obama, Bush and every President before them that has had to deal with North Korea.

Double, double toil and trouble;

Fire burn and caldron bubble.

Fillet of a fenny snake,

In the caldron boil and bake;

Eye of newt and toe of frog,

Wool of bat and tongue of dog,

Adder’s fork and blind-worm’s sting,

Lizard’s leg and howlet’s wing,

For a charm of powerful trouble,

Like a hell-broth boil and bubble.

William Shakespeare, MacBeth

At the risk of beating a well-worn drum, gold is the ultimate safe haven in times of political or economic crisis. This investing truth has been proven, yet again, during recent events in Iran, when gold shot to a six-year high north of $1,600/oz. 

In our post-9/11 age, where the options of colossal damage to human life are limited only by the imaginations of the misguided, anything now seems possible. As investors, the best way to protect ourselves against a global (or regional, depending on where you live) calamity that even a large cache of US dollars could fail to provide, is to own gold. 

And remember the out-of-whack gold-silver ratio, that is bound to compress. Before it does, you want to own silver. 

Demand for silver has never been better and mined supply is shrinking, which should boost silver prices as the year wears on.  

History has shown that the best way to benefit from gold and silver prices going up is to invest in quality juniors that own the projects that are going to become the world’s future precious metal mines.

“Civilizations have consistently used gold as a material of value. Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.” Visual Capitalist

Richard (Rick) Mills
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