Many investors think of gold as a hedge against economic turmoil, inflation, and financial crisis. And with the economy slowing, stock markets near all-time highs and poised for a crash, and the Federal Reserve returning to its money-printing ways, savvy investors have already made the move to invest their portfolios in gold. But while that has helped gold gain value over the past year, that’s not why gold is spiking right now. For that, we have to thank foreign policy.
The assassination of Iranian General Qasem Soleimani a few days ago resulted in understandable panic in markets. If Soleimani was indeed targeted by the United States, it’s the first targeted killing of a foreign military officer since World War II. And given Iran’s ballistic missiles and potential nuclear arsenal, it could also provide the impetus for World War III. That’s why markets are so spooked.
Stocks immediately fell upon the news, while oil and gold went through the roof. An all-out war between the US and Iran would result in huge amounts of new federal debt to fund war spending, and would weigh heavily on world economies. Iran could also shut off access to the Strait of Hormuz through a number of different ways, cutting off 35% of the world’s oil production from oil markets.
Oil prices would spike, economies would grind to a halt due to the higher prices and lessened availability of oil, and markets would undoubtedly come crashing down. None of that has happened yet, but the anticipation of that and the fear that it might occur is enough to send investors running to the safety of gold.
As much as mainstream financial pundits like to denigrate gold, investors understand that at the end of the day, gold is the ultimate stable asset. When everything else loses value or is in danger of losing value, gold just sits there maintaining its value.
That’s why, as soon as news of Gen. Soleimani’s death hit news wires, gold immediately spiked. And with ongoing tension with Iran, the price of gold remains elevated, having already gained $50 this year. If similar tension remains over the course of the year, or if conflict with Iran ensues, expect gold to rise significantly more.
Have you hedged your portfolio against the risks posed by a potential Middle Eastern war? No one could have predicted that something like this would be possible right now, yet here we are. Will war be the trigger that starts the stock market selloff? It certainly could be, and unless you’ve prepared your portfolio by investing in gold, you won’t be protected when that happens.