Gold and Terrorism: Is Your Portfolio a "Soft Target"? By: Jeff Clark, Senior Precious Metals Analyst
GoldSilver.com JUL 7, 2016
The increase in the number of terrorist attacks is no doubt concerning.
In spite of tighter security measures, it feels like the world has become less safe, not more. Polls show the majority of Americans worry about terrorism. Half of respondents in one poll said they would no longer travel to Paris.
There are many angles to terrorism, but as precious metals investors we naturally want to know how gold fits into the picture. Let’s look at the truth and the myths—and how terrorism stretches beyond just one-time acts of violence…
How Gold Responds to Terror Attacks
We buy gold for many reasons, but holding it to protect against a terrorist attack usually isn’t the first one that comes to mind.
There’s little that can be scarier than a senseless act of terrorism. Fear shoots higher among both citizens and investors, and stocks generally do poorly. How does gold perform in times like this?
In light of the recent attacks in Orlando and Istanbul, I looked at the biggest terrorist attacks since 1990 and measured gold’s reaction to them over one day, one week, and one month. Here’s what we found.
You can see that while gold did not rise in reaction to every event, it generally moved higher.
This is what we want from a safe haven investment, especially when you consider what most other investments are doing at the time. In response to 9/11, for example, the S&P was down 4.9% the first trading day after the stock exchange reopened, and down 11.6% ten days after the attacks. Gold held its own compared to the stock market, so its relative performance is even better than what the table reflects.
But terrorism isn’t just about one-time events…
Does Your Smartphone Contain Gold From North Korea?
In spite of ongoing sanctions from both the UN and US, North Korean leader Kim Jong Un defiantly continues his missile testing campaign. Which begs the question: how, exactly, is he able to fund such an expensive program?
It’s difficult to establish facts in a country that is oppressively communistic, cut off economically from other countries, and with a media controlled by the government. But there is strong evidence that one of those sources is the sale of gold and other minerals. And it includes the very possibility that you and I help fund the very missile tests our government is trying to stop…
Gold has a number of uses in electronics. As many of you know, gold bullionproducts from the US Mint must be sourced from domestic operations only—but there is no such restriction for purchases made for electronics.
Reuters reported in March that SEC filings show 25 companies—including Pitney Bowes, Winnebago, and Iridium Communications—had bought gold from suppliers that use a smelter operated by North Korea's central bank.
Most analysts thought the government-controlled refinery was inactive, but supply auditor Conflict-Free Sourcing Initiative reported the refiner has been selling gold bars out of its inventory to generate revenue for the military.
That means your smartphone could inadvertently contain gold that originally came from North Korea. Which means you may have indirectly funded their missile tests.
There are potential ramifications to the gold industry from North Korea’s terrorist activity…
First, new sanctions now require US companies assure that no gold is sourced from the communist country. Although North Korea is a small player in the global gold market, this could disrupt the supply chain for some electronics suppliers.
Second, consider the consequences if a North Korean missile hit a populated area. Or if they launched a live nuclear missile. This scenario would lead to much higher gold prices.
Is Your Portfolio a Soft Target?
Gold bullion can provide a hedge against all forms of terrorism. But even if we don’t personally experience a terrorist attack, your portfolio may feel like it’s under attack when any kind of systemic risk materializes—risks that threaten not just our safety but our standard of living. The kind of risks that can have a deep, personal, and long-lasting impact.
Consider how the following “terror” attacks would impact your finances…
Negative interest rates come to the US (or your country)
Markets lose confidence in the Fed and it becomes front-page headlines
The government forces retirement accounts to buy treasuries
A derivatives chain blows up
The national debt unexpectedly jumps higher
A “special tax” is declared
A major bank fails
A bank holiday is declared
A pension fund can’t pay its obligations
A state can’t pay its bills and declares bankruptcy
Capital controls are instituted
A gold ETF is hit with fraud
A gold dealer fails to make a Comex delivery
All gold buying is temporarily frozen
We can hope none of these things come to pass, but it’s almost certain that several will. Your investment portfolio and even standard of living will be threatened.
It’s nice to know that gold, held in physical form and under our control, can shield us against not just high-impact events of lawlessness, but a world where fear is growing, uncertainty is rising, and risks are elevated.
Is your portfolio a soft target? Or do you have financial preparations in place to withstand whatever crises may personally impact you?
Q&A With the GoldSilver Staff
We’ve had a number of questions about banking, especially what might happen during a crises. Since one risk we face could very well come from the banking system, let’s address a couple of them…
Should I keep cash in the banking system?
Question: As an Insider, welcome! I'm glad you've joined the team! GS.comhas been invaluable to me. Looking ahead to negative interest rates and possible bank bail-ins, I find it nearly impossible to focus on precious metal investing until I figure out where to put my cash. If the big banks (my money is in Bank of America) are leveraged with derivatives and likely to confiscate in a bail-in scenario, where does one put cash with the least chance of losing it? I know that question is somewhat outside of the precious metals investing you do at goldsilver.com, but I’m very disturbed about my currency being in the banking system and I’m tied up in knots until I get this figured out. Recommend a resource? Thank you. Really appreciate what you do, Jeff Y
Answer from Jeff Clark: Thank you for your kind words, and I’m glad you find our research and education valuable.
First, while I understand the worry, bullion and banking are two separate decisions. One should always have some physical bullion—heck, even some mainstream brokers recommend an allocation to gold. This argues that one should decide how much bullion they need right now, and a separate decision should be how to use a bank in light of what could happen to it in a crisis.
But look at it like this. One reason to buy gold is to hedge against the banking system. The very reason the banks could blow up are the very same reasons we should buy gold—if a major bank fails… or a bank needs a bailout… or a bank holiday is declared… or accounts are temporarily frozen… or a special tax is declared and the IRS automatically withdraws funds from your account… or excessive and unexpected fees are added—just imagine how valuable gold would be in that environment!
On the other hand, most of us need to use the banking system to live our lives, so here are some potential solutions…
Use a bank but reduce how much you keep in the system. This is a personal decision, but a good starting point might be to decide how many weeks or months of living expenses you keep in the bank.
Keep some cash out of the bank for emergencies. If it’s at home, store it as safely as possible against fire and theft.
Denominate a portion of your savings in gold and silver bullion. Make sure some of it is in easily recognizable coins. Keep it readily accessible in an emergency.
Consider private, non-bank storage for part of your physical bullion. Many of us here use our international storage options for this very reason.
All of these strategies could be very useful in a banking crisis, as they’d give you a fighting chance to survive the fallout. And since a banking emergency can strike literally overnight, one should put those plans in place now.
Confiscation of banking assets would be an extreme measure in the US, but there are ways to prepare for it and yet still live our lives.
When the derivatives blow up will there be any banks that survive?
Question: I think people are coming to the recognition of the dangers of derivatives that Buffett refers to as “weapons of mass destruction.” My question is, when they blow up is there any firewall between banks? I can't get a handle on the exposure of Canada's largest bank, Royal Bank of Canada, of which I am a client both with the bank and their brokerage arm. The best I hear is their board is very focused on risk. When the derivatives blow up will there be any banks that survive? Regards, Phil C
Answer from Jeff Clark: I can’t speak to individual banks, but I think it’s safe to assume the banking system in general would be directly impacted if a derivatives bomb goes off. And it would impact not just domestic banks but many international ones, too. The fallout could get ugly, and there would likely be an extreme reaction by government officials the world over. I would fully expect some of their “solutions” to be very draconian.
Some banks may fare better than others, and it pays to use a bank that has strong financials, sober management, and low or zero exposure to derivatives. But it’s an interconnected world, and their foresight may only get them so far. If you have a medium to high net worth, you might consider keeping some of your assets in a foreign bank, though that’s become increasingly difficult to do for US citizens, and in most cases you’d have to open the account in person. Diversifying is also wise (using more than one bank), as well as investigating a credit union.
My personal approach has been to use the strategies I outline in the answer above. We can’t protect against all conceivable outcomes, but having a plan in place will give us options when we need them most.