How Do You Hedge Against the Effects of Geopolitical Conflict?

Apr 30, 2024

The current rally in gold prices approaching $600 an ounce began within hours of the Hamas attack on Israel last October 7th. Since then, extraordinary demand from central banks, retail demand from Chinese buyers and uncertainty about the direction of inflation and interest rates in the U.S. have continued to fuel prices for physical gold. Now, again, conflict in the Middle East has returned to center stage as Iran retaliated against an Israeli strike on its embassy in Syria, and Israel in turn retaliated against Iran.

The Middle East has a record of cycles of violence like this, but these exchanges are the most dangerous in decades. Iran has multiple means of responding if it chooses to, with its own weapons, or through proxies such as Hezbollah in Lebanon. As I record this, both countries appear to be exercising restraint. The Middle East is one of the most volatile areas in the world. Multiple geopolitical fault lines run through the region. There are decades long tensions between Israel and Iran, the U.S. and Iran, Israel and the Arab states, the US and Russia, and of course, the West and non-state terrorist organizations.

A third of the world's oil comes from the region, and 30% of global container shipping passes through the Red Sea. The Strait of Hormuz, off the southern coast of Iran, is a chokepoint for the transport of oil out of the region and around the globe. If Iran wanted to close the strait, it could easily do so by sinking a tanker in the narrows. The impact on oil prices, the global economy, and politics around the world would be profound. Gold has risen by almost $600 an ounce, 31%, in the six plus months since October 7th.

I think there's a broad consensus that prices are likely to continue their ascent as buyers seek the safe haven. Gold has offered for thousands of years. No other asset provides that kind of protection in times of such uncertainty. I encourage you to contact us here U.S. Money Reserve to learn more. Thank you.


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