Gold in time of war
Currencies are debased during and after wars, because government spending goes through the roof not just due to defence spending but also because of the economic consequences.
Financial markets, particularly in North America and Europe are ignoring the lessons of history. By their actions participants beleive that it is the marginal cost of holding gold over prospective interest rates which determine the former’s value. The assumption is that inflation is increasingly likely to surprise on the upside as a result of the closure of the Straits of Hormuz, removing the hoped-for reduction in interest rates later this year and substituting the likelihood of an increase.
This is thoughtless nonsense which assumes that currency deposits in a bank are the ultimate safety. The delusion is primarily due to accounting investment returns in these currencies, which ignores the factors changing their purchasing power. Last week has been a prime example of this error, as the values of currencies have been driven higher against those of gold and silver.
Trading short-term is particularly hazardous. But there is a major benefit for stackers prepared to benefit from an arbitrage between current investment misconceptions about the role of gold and silver, and the reality which always undermines currency values following war.
In early European trade this morning (Friday) gold was $4225, having rallied from a low of $4029 yesterday morning on news from the White House that a settlement is being agreed with Iran which will lead to Hormuz being opened this weekend or possibly Monday. But it should be noted that Iran said that there’s no agreement and restated its red lines. At $67.30, silver rallied this morning from yesterday’s low of $61.50.
The problem we have in assessing the immediate prospects for gold and silver prices can be summed up in the following bullet points:
