• 2 hours The Best Way To Ride The Gold Rally
  • 23 hours Corn Industry Reeling After Shocking Ethanol Decision
  • 2 days Gold Miners Eye Further Upside
  • 2 days Alibaba Exec Sets Record With $3.5 Billion Brooklyn Nets Purchase
  • 3 days Smart Contracts: The Tech Reshaping Entire Industries
  • 3 days Protests Threaten $5 Billion Peruvian Copper Mine
  • 4 days Why Wealthy Kids Are Getting Into College For Free
  • 4 days Is Is Too Late To Get Into The New Gold Boom?
  • 4 days Solar Tech Breakthroughs Spark Surge In Adoption
  • 5 days These Rare Stones Are About To Become Priceless
  • 5 days Why Silver Miners Aren’t Living Up To Expectations
  • 5 days WeWork Reveals Huge Losses Ahead Of IPO
  • 6 days American Education Continues To Fall Behind China
  • 6 days EV Sector Needs 250% More Of This Metal By 2030 Just For Charging Stations
  • 6 days Why Gold Prices Are About To Skyrocket Even Higher
  • 7 days Scientists Create The World’s First 2D Gold
  • 7 days The Key To Commercial Fusion
  • 7 days Inflation Is Creeping Up In Consumer Goods
  • 8 days U.S. Healthcare Industry Could Be Decimated By The Trade War
  • 8 days Washington's $400 Billion Emissions Plan
The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

  1. Home
  2. Markets
  3. Other

Gold and Terrorism

Below is an extract from a commentary originally posted at www.speculative-investor.com on 31st July 2005.

Gold and Terrorism

Attacks by terrorists linked to al Qaeda and other radical Islamist groups have recently begun to occur with greater frequency. Also, the recent attacks have been small-scale compared to previous efforts and appear to have been carried out with less preparation. All of which suggests increasing desperation on the part of the barbarians. Furthermore, the fact that more frequent smaller-scale attacks are occurring points to an inability to effect an operation on the scale of the September-11 attacks on the US, the Madrid train bombings of 2004, or even the 1998 bombings of two US embassies in East Africa.

If the recent small-scale attacks do represent a last-ditch effort by al Qaeda to reinvigorate its barbaric agenda then similar attacks are likely to happen over the coming months, but attacks like these probably won't have a big effect on the financial markets. However, let's assume, for the moment, that these smaller attacks are essentially just diversions and a large-scale attack is being planned. How would the markets react in the event of a devastating attack by terrorists in the US or Europe?

In our opinion, the performance of the markets in the wake of the September-11 2001 attacks provides the most plausible answer to the above question. As far as the gold market is concerned, the below chart of the London gold price -- we are using the London market in this analysis because the New York market was closed during the days following the attacks -- shows that the gold price spiked up by about 10% and then quickly dropped back to about where it was prior to the attacks. The chart also shows that about two months after the September-11 attacks the gold price commenced a large 3-year advance.

The gold market's response to the events of September-11 2001 was not surprising because gold is not a hedge against terrorism or war; it is a hedge against a loss of confidence in fiat currency. When the September-11 attacks happened a gold bull market was already in its embryonic stage as a result of the loss of confidence in the dollar that resulted from the bursting of the NASDAQ bubble and, more importantly, the Fed's attempts to inflate-away the bad effects of the bursting bubble. And while the attacks themselves caused a knee-jerk reaction in the gold market, it was really the inflationary responses of the Fed and the US Government to the attacks (and to everything else that was going on) that caused the gold price to move substantially higher.

The bottom line is that if you think a large-scale terrorist attack has a good chance of happening over the next few months (we don't) and you are looking for a way to financially hedge against such a dire outcome then you'd be much better off being 'short' the stock market than being 'long' gold. However, if, like us, you expect the Fed to aggressively promote inflation over the next few years regardless of what happens on the terrorism front then you should be planning to buy gold during this year's dips.

Current Market Situation

Below is a daily chart of the Dollar Index covering the past five years. Resistance at 92, which is clearly evident on this chart, is our long-standing target for the FIRST upward leg in dollar's bull market (our view is that the dollar is in a cyclical bull market within the context of a long-term bear market). However, the longer the dollar spends consolidating in the high-80s the greater the chance that the first upward leg will exceed this resistance.

Gold and silver are rebounding from near the bottoms of their respective consolidation ranges, which, as noted in last week's Interim Update, was the highest probability outcome. We wouldn't be surprised if these rebounds took gold as high as $440-$445 and silver as high as $7.50-$7.60 (the tops of the consolidation ranges), but we would be surprised to see gold and silver move significantly above the aforementioned levels at this time.

The consolidations in the gold and silver markets that have been in progress since early this year will, in our opinion, end via downside breakouts, but we could still be a month or more away from any breakout.

Back to homepage

Leave a comment

Leave a comment