THE WAR AND GOLD

 

Gold has dropped precipitously since the beginning of the war.  This has confused many who assumed that gold is a hedge against war.

Gold is a hedge against monetary instability.  War produces monetary instability - over time.  So over time  gold is a hedge against the monetary instability produced by war - but it does not react to fighting itself.  The fighting in the short run seems to be causing some to sell their most profitable investment (gold) to stock up on weapons and oil.  Even with the massive sell off, gold is still the most profitable investment year to date!

But gold will react over time to the debasement of the currency that must occur to support the fighting and offset the tremendous increase in commodity prices: in this case especially, in oil, feritlizer, refining processes and food.  All essential expenditures for the average citizen.

Already, this fighting has resulted in an appropriation of 200 billion dollars for supplemental spending.  That covers the first 4 weeks of fighting. (and this is on top of the current  trillion dollars of spending every 100 days.  The most in US history.)

Already the cost of oil has gone from about $60 to aboutn $100.  Just in the first 4 weeks of fighting.

The United States has stated it has already won the war.  Therefor, we must conclude that victory in this war will do nothing to slow down the pace of war spending, since we still need the supplemnetal 200 billion dollars. 

And victory has done nothing to open the straights of Hormuz, so we must conclude that they will stay closed.  Therefor, over time, affected commodities like oil, refining capacity, and food will continue to rise in price.  Subsidies to the 80 percent that lives hand to mouth will be required, just as it was during covid.

So when will gold start to reflect the resultant degradation of the currency?  Well, most obviously when the new Fed comes in, and the new Fed chair begins to cut in support of the war effort in spite of the rise in inflation.

Surely, he won't do that?

Surely, he will.  Otherwise he would have not been selected for the job.  The odds on a Warsh rate  cutting regime according to Polymarket are 87 percent.   I would place them at 100 percent.

But it won't take that long.  Because the war will reinforce for global central banks urgent need to continue to diversify away from the currency of the country that is waging this most destabilizing war

And most obviously the global rise in long dated rates puts massive pressure on debt service which necessitates ever more printing of currency to service the growing debt..

There's no timing for this type of situation.  But gold will resume its rise sooner, rather than later.  Not because ot the death and destruction.  Because of the expense of the death and destruction.