How Geopolitical Risks Could Boost Gold

On April 4, 2017, hundreds of people flooded the local Syrian hospital – from the patients’ rooms to the operating rooms and the corridors. Some were dead on arrival, the result of asphyxiation. Others presented symptoms like pale skin, sweating, narrow or pin-eye pupils, and difficulty breathing…all symptoms of a nerve agent called Sarin.

This happened just a couple of weeks ago in Syria, when a rocket carrying the deadly chemical agent hit the city of Khan Sheikhoun. Soon after the attack on civilians, U.S. warships launched 59 Tomahawk cruise missiles at the airbase where the planes carrying the chemical were based.

Needless to say, this U.S. military strike on a Syrian government airbase has increased global tensions. And, regardless of your political view, this could have important implications for investors, especially for those who are considering gold. Here’s why…

Two New Geopolitical Risks
We’re not here to discuss political views. Instead of discussing the merits of the recent U.S. intervention, we’re here to discuss the investment implications of two recent geopolitical developments.

Here are the facts…

Fact #1
Escalating Tensions Between The U.S. & Russia
The recent U.S. attack has implications that go well beyond Syria. For example, it has increased tensions with Syria’s allies, Russia and Iran. Just look at the reaction of Russian leaders following the U.S. military response.

Russian Prime Minister Dmitry Medvedev said the U.S. bombing has “completely ruined” relations with Russia and that it has brought the two countries on “the verge of a military clash.” 1

Russia and Iran also released the following joint statement: “What America waged in an aggression on Syria is a crossing of red lines. From now on, we will respond with force to any aggressor or any breach of red lines from whoever it is and America knows our ability to respond well.” 2

In other words, if, for any reason, the U.S. launches another attack on Syria, Russia could counterattack. The risks of a military conflict between the U.S. and Russia have greatly increased in recent weeks. At least, that’s the overall perception in the markets.

But, perhaps there’s an even bigger threat to global peace…

Fact #2
Escalating Tensions Between The U.S. & North Korea
You might have heard in the news that North Korea has been testing nuclear weapons. According to estimates, North Korea already has 10 nuclear weapons and enough nuclear material stockpiled to craft up to 100 more. They’re also working on developing a missile with an intercontinental range that could reach the U.S. west coast.3

If North Korea ever achieves its goal of merging these two technologies, the rogue country would be able to attack Los Angeles and other major cities on the U.S. west coast with a push of a button. Some experts say they’re still a few years away from developing that kind of technology.

Nonetheless, the U.S. government might intervene if North Korea doesn’t abandon its nuclear plans. After all, North Korea has already threatened to reduce the U.S. “to ashes.” 4

U.S. Secretary of State Rex Tillerson recently said, “action has to be taken” regarding North Korea because “the situation has intensified and has reached a certain level of threat.” 5

Zhang Liangui, a professor of international strategic research at a major Chinese university, believes the risk of a U.S. war with North Korea over its nuclear program has significantly increased. He says: “[North Korea] has already touched the red line of the U.S. and it seems that the U.S. does not have other choices. The possibility of military action is increasing.” 6

Bad News For World Peace…Good News For Gold
As you can see, geopolitical risks have greatly increased in recent weeks. While this is bad news for global peace, it may be great news for gold. Although past performance is not a guarantee of future results, the yellow metal has tended to perform well in times of political and financial uncertainty and security risks. After the U.S. bombed the airbase in Syria, for example, gold climbed to its highest level since last November.

With tensions rising between the U.S. and Russia and North Korea, this “safe-haven” bid could continue to provide support to gold in the coming weeks.

With the geopolitical uncertainties mentioned above, do you think now is a good time to consider adding gold to your portfolio? Let us know by visiting our blog and posting your thoughts in the Comments section.

Until the next Daily Pfennig® edition…

Tim Smith
Vice President
EverBank World Markets, a division of EverBank