A Critical Reason To Hold Gold

(Jul. 2, 2015 - by Markos Kaminis, SeekingAlpha)  

Summary

• Gold is worth holding in diverse portfolios even despite the determined dollar strengthening trend.
• Terrorism events are on the rise and at unprecedented levels globally.
• Terrorism plots against the U.S. have been on the rise and this year are at levels not seen since 9/11.
• Terrorism against U.S. interests within our borders pose a danger to the dollar.
• Sustained disturbances or a catastrophic attack could have a lasting impact and drive gold sharply higher.

After speaking with a globally connected friend of mine this morning, I was reminded of a good reason to hold gold. This friend of mine is an employee of a universally known global non-profit. She said to me that she is going to have to stop reading the daily news compilation that is provided to her each morning, because it is simply too disturbing. She expands, "It’s all about ISIS. ISIS is everywhere." It’s that last part that troubles me most. Yet, in a recent article, I reasoned why 3 recent terrorism events were non-starters for gold. This article does not contradict that piece, because if ISIS is everywhere, then it should not be long before we start to see its sponsored terrorism here in the United States as well. The 3 terrorism events that happened abroad were not a problem for America and so not a problem for the dollar. When that critical fact changes, and some important representatives of our government are indicating that could be as soon as this weekend, gold prices likely find support. Still, minor and occasional terrorism remain non-threats to our economy and the dollar; rather, it would take a significant event or regular disturbances to stop the current and very powerful trend of dollar strengthening.

1-Year Chart of Gold (Spot Price)

Holding gold has not been a profitable endeavor over recent history. The price of gold has been dramatically impacted this year by the important move of the dollar and its appreciation against the yen and euro. As the dollar has gained, gold has fallen.

1-Year Chart of Dollar Index at Bloomberg

This is the trend that is expected to continue over the near term as well. The dollar is appreciating as the U.S. Federal Reserve pursues plans for monetary tightening just as the European Central Bank (ECB) and Bank of Japan (BOJ) pursue extraordinary easing measures. For as long as the dollar appreciates in value, the dollar price of gold is under pressure. Still, the bubbly level of the dollar seems to present vulnerability, and I believe the dollar is destined to reverse its trend dramatically once the ECB and BOJ are able to reverse their monetary policies. However, that inflection point is still too far out to matter today.

Any factor that threatens the dollar is a reason to hold gold if you believe as I do that gold has currency value. I maintain that gold is mankind’s fallback currency due to its historical durability as a holding for governments and for individuals and institutions. When the nations that back fiat currency come under pressure, especially if there were a global issue limiting other currency options as safe haven, then gold becomes the most liquid other option. Gold is a precious metal and currency for use as proxy for bartering in extreme scenarios, but also an option during times of instability.

Terrorism globally has reached new disturbing levels, as the Islamic State and other terror groups spread. Terror plots against the U.S. are on the rise, as terrorism attempts have increased to a level highest since 9/11. Republican Congressional Representative Peter King of New York recently stated, there is "great concern" among law enforcement heading into the July 4th holiday weekend. King warned on This Week with George Stephanopoulos, "There’s great concern. I would say there’s probably more concern now than any time since September 11." On Friday, as the 3 terrorism events unfolded overseas, the FBI and Department of Homeland Security issued a bulletin warning of heightened concern about the prospect of an ISIS inspired attack heading into the July 4th holiday. I am concerned that one attack could inspire others, and I believe our vulnerabilities are many.

I want to make one point in closing. Lone wolf attacks do not threaten the dollar if they are rare and on a less than catastrophic level. While they can have a short-term impact on trading, they should not disturb the otherwise solid strengthening trend of the dollar, and so cannot give gold a sustainable driver to break out of its recent range. While, the plans and capabilities of ISIS are unknown to us, its hatred and interest in harming us is immense. A catastrophic event or sustained disturbances could have a lasting impact and drive gold sharply higher. So given this risk should be gaining weight in scenario analyses, it is one critical reason to hold gold long term despite the latest dollar trend. My long-term position remains hold gold in diverse portfolios.