Tensions are brewing in several of the world’s hotspots, fostering uncertainty that drives investors towards gold. Safe haven assets come at a premium during times of global conflict, meaning a resurgence in gold prices is all but guaranteed. The writing is on the wall, folks.
Minor skirmishes and localized violence are often a prelude to war, and we’re seeing plenty of that these days, but the thing worrying me most is global inequality. There’s only so much desperation people can endure before they turn to something that gives them a sense of identity.
Whether it’s a terrorist cell, religious fanaticism, or sectarian strife, people under pressure inevitably succumb to their worst impulses. Today’s particular blend of conditions is disturbingly reminiscent of the lead-ins to WWI and WWII.
Global Conflict Could Push Gold to $5,000
First, there was a period of unrestrained financial excess, a boom period of American capitalism funded by runaway Wall Street investors. Am I talking about the 1990s and the 2000s? I could just as easily be referencing the 1920s, or the “Roaring 20s,” as they were known.
However, both booms ended with stunning crashes; one in 1929 and another in 2008. Although we commonly refer to the past few years as the Great Recession, famous economists like Paul Krugman have insisted it’s more like a depression. (Source: New York Times, October 2, 2014).
The economy has been through a prolonged period of weak performance. And broadly speaking, that’s a depression. We’ve just turned a blind eye to it.
There are several clear indications of a coming war, but I want to underline the relationship between war and gold. Conflict breeds uncertainty, and uncertainty creates demand for hard assets, especially gold. Why does the yellow metal get special attention, you ask?
Well, let’s not forget that gold was used as money before currencies existed. It doesn’t perish in fire or water, nor does it corrode from rough use. And it’s a physical substance found in natural deposits, giving it a definable value.
Between 2001 and 2011, when faith in the global financial system was rapidly depleting, gold prices jumped nearly 600%. Prices more than doubled from 2008 to 2011 alone, showing how much investors treasure the yellow metal when times get rough.
Chart courtesy of www.StockCharts.com
What’s a little surprising is the willingness of investors to ignore the possibility of war. Natural resources are increasingly scarce, regional tensions are rising, and central banks are engaging in currency wars that could easily grow into trade wars. We hear about this stuff on a daily basis, but few people have the courage to make the logical jump.
How Possible is Another World War?
One tinder box we should be paying very close attention to is the East China Sea. Time and again, we’ve seen China and Japan at loggerheads over a bunch of seemingly insignificant islands. Nobody even lives on these islands, yet they are fiercely contested on both sides.
Believe it or not, part of the animosity stretches all the way back to Sino-Japanese War in the 1930s. Japan was running short of raw materials, something they saw as abundant in the Chinese province of Manchuria. A Japanese general staged a minor railway bombing in northeastern China, using it as a pretext for invasion.
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What followed was eight years of war that led up to World War II. Now, leaders in both China and Japan are ramping up their nationalist rhetoric while refusing to rule out a military conflict. These are bad omens. (Source: The Economist, December 21, 2013.)
However, the natural resource grab is in the other direction this time. This may sound ridiculous, but China is building (yes, physically constructing) islands in the South and East China Seas to reinforce their territorial claims.
Creating land they own in those seas also allows them rights to any natural oil and gas exploration within a 12-mile radius. However, they can apply for a special license that extends their claim up to 200 nautical miles. (Source: Quartz, February 21, 2015.)
Could This Send Gold Prices Higher in 2016?
The details may have changed, but the underlying conflicts are astoundingly similar. A resource grab, national chest thumping, and an epidemic of currency depreciation. These are all worrying signs, but at the very least we know they will push gold higher.
If the yellow metal sees another decade like the one between 2001 and 2011, it could hit $5,000 per ounce before 2025.