Is Gold really being driven by "GEOPOLITICAL RISK?"

 

The pundit class always has to say something to make it sound like it knows something.  With gold, the new fad is to say that it is being driven by "Geopolitical Risk."

Is that really any different from economic risk?  

Let's look at the various risks:

1) The US election.  Sure that has "geopolitical" consequences.  But there are only two possible outcomes.  

First, Trump wins.  That means tarrif wars which are highly inflationary: excellent for Gold.  And it mean a new Fed Head who will be instructed to drop rates back to Zero and he will comply.  That mean hyperinflation.  Excellent for gold.  (How do I know?  Trump has promised this.)

Second Biden wins,  Trump doesn't concede.  The republican congress suppports his opposition government, the country splits and economic activity grinds to a halt.  This is a recipe for recession or depression - which would appear bad for gold (and every other asset), but then the Fed would be forced to print money like crazy to bail everything out and that means Stagflation.  Also great for gold.

2)  The Ukraine Russia War.  The pundits act as if the possibility of a tactical nuclear weapon scares the public into buying gold.  The reality is that the economic effects of this war are profoundly supportive of Gold.

A) the American weaponization of the dollar and the swift system has caused many central banks - especially China - to dedollarize - stop using their trade surplus money to buy US Treasuries and instead buy gold.  This not only directly supports the price of gold but is highly inflationary in the US as the Fed has to print money to buy the Treasuries other central banks won't buy.

B) All the oil and grain that once flowed from this war torn region to the West now flows to China.  THis is inflationary for evnergy costs and food costs in the West.   Sounds like that is economically supportive of Gold.

3) The War between Israel and Hamas/Hezbollah/Iran.  The US is on the side of Isreal.  Russia is on the side of Iran, and since Russia is now an economic client state of China as Reussia depends on China to buy all its commodities that it can't sell to the West, we can surmise that China is also on the side of Iran,

Sound like a Geopolitical Mess but it's really not the threat of nuclear war that's driving the gold price.  IF there's a nuclear war, gold won't keep you from getting incinerated.  This war is being fought in the region that supplies most of the world's energy.  And it controls the most important shipping lanes for energy delivery - and the delivery of many other goods.  Energy costs are the major input cost for almost every industry.  This is highly inflationary and thus ecxcellent for gold.

So this fastening on "Geopolitics" as opposed to "Economics" which we are assured are in excellent condition - is really a distinction without a difference.  If Geopolitics suffer - so do economic conditions.

The unusual thing about both the geopolitics and the economic conditions they support is that there is very little guess work involved this time around..  Our candidates have told us what they will do.  Compromise is not on the table.  In fact it is despised as weakness.  The combatants in the various wars have made clear their completely intransigiant positions.  None of them want peace, unless it involves unconditional surrender of the other side.  

Only those looking on the outside through fantasy tinted glasses can see "two state Solutions" or "coaltion governments."  This time around that's just not on the table.

So this is a rare case where the effets of the future on the price of gold a known.  

THis is why gold is moving as it is.