Precious Metals And Terrorist Attacks

by: Daryl Montgomery


Gold has traditionally been a safe haven in a crisis and it moved up strongly after 9/11 when almost all other assets had major selloffs.

After a prolonged multi-year down move, terrorist attacks remind investors that it's useful to have some insurance in their portfolios.

When news of yesterday's Brussels terrorist attack was released ALL precious metals -- gold, silver, platinum and palladium -- moved up.

Markets in general were only slightly impacted as a result of the horrific terrorist attack in Belgium yesterday (March 22nd). Stocks were down initially, but not by that much. Currencies barely moved, with the exception of the British pound (NYSEARCA:FXB), which was down around 1.0%. That was not a direct result of the terrorist attack, but because it was viewed as increasing the chances of a BREXIT 'yes' vote. As has always happened when gold has been allowed to trade freely, it was up (and so were the other precious metals - silver, platinum, and palladium). While stock market reaction to terrorism this time has been mild, this has not always been the case. There is also no guarantee it will continue to be so. Gold, on the other hand, has been a safe haven in a crisis from time immemorial and there is no reason to think this will change.

Market reactions to terrorist incidents understandably are proportional to how serious they are. The massive 9/11 attacks crashed stock markets throughout the globe with drops of 5% to 10% taking place the next day. The U.S. dollar dropped significantly against the pound, euro and yen as currency trading continued while the crisis unfolded. The U.S. stock market was closed until the following week, and when it reopened, horrendous selling took place for days. Amidst the financial carnage, gold rose like a phoenix from the market's ashes rallying in London trading from approximately $272 an ounce on September 10th to $294 on September 17th, or 8%. Gold showed itself to be a great hedge during the crisis.

At the time, gold was just ending a 21-year bear market and entering a 10-year secular (long-term) bull phase. Currently, it is just starting to rise after a five-year downturn. Terrorist incidents are likely to have the strongest long-term impact during these market turns because they remind investors that it's good to have some insurance in their portfolios since crises are inevitable. The naysayers, of course, will say gold has no dividend and shouldn't be bought. The same can be said about term life insurance, but it's priceless when you need it. The question can also be asked, "How much of a coupon does a negative interest rate bond have?"

Why gold has entered a bull market was discussed in early March in: "Long-Term Charts Indicate Gold Market Turning From Bear To Bull" and "The Case Strengthens For A New Bull Market in Gold". Since that time, many on TV and in the press have insisted the gold rally is over even as its charts have continued to strengthen further. Gold has made a very bullish double-golden cross (the 10-week moving average has moved above the 40-week and then the 65-week). Decades ago, before computers were available, commodity traders relied on the simple rule that if a commodity's price moved above and stayed above the 65-week moving average, it was was bullish. Based on that criteria and a host of modern technical indicators we can now use, gold has exited its recent long bear period and is now ready to rise for an extensive period of time.

In the 3-year weekly gold price (NYSEARCA:GLD) chart below, the yellow line is the 10-week moving average, the blue line the 40-week and the red line the 65-week. It can be seen that the 40-week and 65-week moving averages have also recently started moving up, which is bullish as well. The double-golden cross is also clearly illustrated.

Gold Two-Years Weekly Chart Showing Trading Above 65-Week Moving Average

Silver is not nearly as advanced in its rally as gold. Price has moved above the 65-week moving average recently and the 10-week has crossed above the 40-week (a golden cross). Yet, this still needs to be confirmed by a cross of the 10-week above the 65-week. Unlike gold, silver is torn between two worlds. About 50% is used for investment and 50% for industry, so it won't react as strongly as gold to a crisis.

Silver (NYSEARCA:SLV) Two-Years Weekly Chart Showing Trading Above 65-Week Moving Average

Platinum and palladium are both predominantly industrial metals (like aluminum, copper, lead, nickel and tin), and are thus even more economically sensitive than silver. Their major uses are in automobile manufacturing. Neither has yet moved above their 65-week moving averages, but both are trading above the 40-week. Platinum is more bullish than its sister metal palladium, however. The golden cross is just being made on its weekly chart (10-week moving above the 40-week moving average). Palladium's chart is still fairly bearish looking though.

Platinum (NYSEARCA:PPLT) Two-Years Weekly Chart Showing Trading Above 40-Week Moving Average

Palladium (NYSEARCA:PALL) Two-Years Weekly Chart Showing Trading Above 40-Week Moving Average

The precious metals tend to move together with gold being the leader of the group. So if gold is entering a long-term bullish phase, the other three metals will follow. If at the same time the economy is weak, it will tend to hold platinum and palladium down. It was interesting to note that the price of all four moved up on the news of terrorism in Brussels as almost every other asset price moved down. As stocks recovered and turned positive in some cases, the precious metals faded. The primary mechanism for investors to buy the precious metals now, ETFs that held the metal itself or some proxy, were not available during the 9/11 attack in 2001.

The major ETPs (ETFs and ETNs) for investing in gold are: GLD, IAU, SGOL, DGL and OUNZ. For silver, they are: SLV, SIVR, DBS, and USV. For platinum these include: PPLT, PTM, and PGM. For palladium, investors can use PALL.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.