Broader Conflicts, Higher Interest Rates, and Gold

What would it take for gold, silver, oil, and the dollar to begin rising, and the Euro and stock market to begin falling, at 230 AM CST? Any number of things, perhaps. How about an announcement from the President of the Russian Federation, about mobilizing 300,000 Russian reservists and veterans to fight in a widening war with “the collective West?” Yes, that would probably do it, and it did. Early this morning (September 21, 2022), Russian President Vladimir Putin released a pre-recorded message outlining new actions and resolve in relation to the war with Ukraine, and in defense of Russian territory. This has obvious implications for the international community of nations going forward, and for precious metals investors worldwide. What if we combine this news with an announcement by the Federal Reserve later today, that they will raise interest rates by 0.75%? Busy news day for the markets.

It was only three days ago I posted some recreational writing on social media entitled “Military Musings,” in which I discussed the striking parallels between the Spanish Civil War of 1936-39 and the Russia-Ukraine conflict of 2022. As an amateur student of history, I pointed out that 40-50 nations sent troops and new military equipment to Spain, as new techniques and warfare strategies were deployed that would later be used in a much wider conflict (World War II). With as many as 1/3 of those fighting in Ukraine being a citizen of various NATO countries (including the US), and some of those serving in militias supporting Russia from various countries (including the US), it seems the conflict has already become international.

It looked like new techniques and weapons were being used in Ukraine, and I expressed hope that the similarities with the Spanish Civil War stopped there and did not lead to a broader international conflict.  Unfortunately, it now appears the conflict is already broadening.  Besides the announcements made public earlier today by the Russian leader, there are unconfirmed reports of Chinese military equipment entering Russian territory, with suggestions it could be headed for Ukraine.  A more likely view is that it is related to joint military exercises conducted annually.  We certainly hope so.  Nevertheless, momentum is underway in the wrong direction, and the conflict has already become worldwide in impact, affecting citizens throughout Europe and worldwide.

The financial effects related to the conflict are impacting citizens and nations thousands of miles away from the military conflict occurring in Ukraine. A couple weeks ago we wrote about how higher energy prices were shuttering businesses and industries across Europe, while also providing support for precious metals prices. In previous conflicts, energy production was reduced by bombing infrastructure. In this conflict, most of the energy disruption is caused by sanctions and disagreements, rather than by explosions. But the economic impacts on civilian society are significant, even without bombs falling on power plants throughout Europe. Natural gas prices are also up 300% here in the United States, with new pressure on authorities to export less energy to Europe, to help keep utility prices lower here at home.

Higher energy prices are not the only thing adding difficulty to the world economy. Later today, the Federal Reserve is expected to announce another interest rate increase of 0.75%, as they try to bring inflation under control here in the United States. 15 other central banks will also be announcing future interest rate policy this week, with several expected to follow suit by raising rates. Restricting capital and making loans more expensive by raising interest rates provides a further drag on the overall economy, and will make a soft landing nearly impossible, as explained here.

When we think about a widening military conflict abroad amidst a financial campaign to defeat inflation here at home, it makes sense to consider how these things might impact precious metals prices, financial markets, and the economy. We know that higher food and energy prices worldwide directly result from the Russia-Ukraine conflict or its economic sanctions. These add drag to the overall economy and have provided headwinds to stock and bond prices. Raising interest rates makes life even harder for stock and bond prices, as they become less attractive compared to risk-free returns from new treasury securities paying higher interest. But even with today’s interest rate increase, rates are still negative in a real sense compared to inflation.

The argument against gold not paying interest or dividends becomes less critical when interest rates do not keep up with inflation and stocks lose value. When people tire of losing money in the stock and bond markets, they begin looking for alternatives. So far this year, a composite of precious metals has outperformed most major stock and bond indexes. This trend will continue, especially in light of today’s announcements of widening conflict and higher interest rates. While the movements on any given day can be higher or lower, the current trend is lower for stocks, bonds, and real estate and higher for precious metals. This has been true during previous periods of stagflation and so far in the current period.

Over the past couple of weeks, I have encouraged both the readers of this blog and my financial clients to consider owning physical precious metals. I have also followed my advice by making additional purchases of gold, platinum, and silver. I believe physical precious metals will be a good place for investment capital over the next several years. We own a mixture of bullion products, coins of historical significance, and investment grade products. All these can be purchased at the United States Gold Bureau, and you can track the performance of all your holdings via the website's handy "PortfolioTracker" section.  

You can see for yourself by setting up an account and seeding it with the metals of your choice. The Texas Bullion Depository also provides a safe and convenient option to store your metals. In times like these, it behooves us to own tangible assets such as physical precious metals. The events of today help make this point clear.