Gold - Why This Geopolitical Issue Is Different (Part II)

Aug.28.14 | About: SPDR Gold (GLD)


Geopolitical issues in Iraq, Gaza and Africa are not as significant to gold as the situation in the Ukraine, which I see as highly important.

Ukraine matters to gold prices and the prices of the gold relative securities because of the involvement of Russia, and the repercussions of economic warfare on western economies and currencies.

For as long as East is pitted against West in Ukraine and threat to the U.S. economy and dollar exist, gold is supported even despite the outlook for interest rates.

In Part I of this two part series, I explained why I believe ignorant opinions pervade on this issue. Now let me explain why the issue in Ukraine is in fact important and how it varies from the Islamic State issue, the Gaza event and the Ebola scare.

The geopolitical issue in Iraq is currently of little consequence to gold because it is highly unlikely to threaten the United States any time soon. Though, if terrorists were to successfully and importantly attack the United States, the full faith in credit in the United States could theoretically come into question (it would have to be big) and the dollar might depreciate against gold and other currencies. However, we are not near such a scenario at this time, so the Islamic State is a non-issue, or deserving of little weight in the near-term gold equation. The same goes for the Israel/Gaza conflict and the Ebola scare. These events are many degrees away from affecting global trade even, let alone striking harm to the dollar.

Ukraine is different, though, because when we engage Vladimir Putin in economic warfare, he is likely to return fire. In the very near-term it appears Russia can do more damage to the EU than the United States, and so the euro softens and the dollar strengthens. But Putin is not beyond striking at the United States, though in covert manner to do harm to the U.S. economy and dollar in my opinion. A direct engagement between the forces of East and West, if Ukraine were to escalate, would put every ugly possibility on the table. As the United States is obligated by treaty to assist nations in the region, and given the power of Russia, there is clear and present danger to the euro and the dollar that must be discounted. Capital will find mankind's default currency in such cases, and that is gold.

Click to enlarge

GLD Day Comparison to SPY at Yahoo

Today, with capital flowing into stocks, the SPDR Gold Trust (NYSEARCA:GLD) still climbs higher. In fact, it gapped open higher Tuesday morning on the news of the capture of the Russian soldiers in Ukraine. In the recent past, when stocks rose, capital often flowed out of gold to feed it. Lately gold has even defied risk of interest rate increase (before Yellen's speech), which would strengthen the dollar against gold; it has done so because of this geopolitical issue. More specifically, it's due to reports of Russian tanks in or near Southern Ukraine; due to the capture of Russian soldiers within Ukraine territory; and due to the disagreement between Vladimir Putin and his Ukrainian counterpart as they met Tuesday in Minsk. You can find all these stories and other news covered at this news aggregation site daily.

I hope I've shown clearly why this geopolitical issue is different because of the threat it poses to the dollar and U.S. economy. Readers should now better understand why the geopolitical issues cannot always be simply overlooked or bunched together, but I do recommend reading some more of my articles authored over the past few months for more clarity. Each geopolitical issue is different and some are potent. Thanks for reading this far; parties interested in ongoing gold and market commentary may want to follow my column.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.