On October 7, Hamas1 launched thousands of rockets into Israel, and militants drove deep into Israeli territory and killed more than 1,400 people. The tensions on both sides have existed for many years, but attacks with these tactics and scale are unprecedented.2
The US is now involved in intense military commitments in Ukraine, and Israel, while tensions with China over Taiwan threaten to add a third conflict region to the spending needs.
Those military budget commitments are essential for geopolitical reasons. However, they come at a time when US debt costs have crossed a critical metric that can signal weakness for bond markets—namely, 14% of tax revenue goes solely toward paying US debt interest payments. The country faces budgetary pressures coming from rising US debt servicing costs (paying interest on Treasuries),3 increasing defense spending,4 and growing environmental commitments.5
The combination of geopolitical conflicts and budget stress are conspiring to keep investors defensively positioned with high allocations to cash—some cash instruments currently yield 5%.6
Meanwhile, investors are paying closer attention to oil and gold during this period of geopolitical turmoil. According to Bloomberg data, gold ETF investors have sold more than 20 million ounces of the shiny metal from April 2022 through October 16, 2023.7 Yet central banks have purchased gold in record amounts.8 If investors return to the bourse to purchase gold again, price action could get interesting. Gold prices have risen 9% in the immediate aftermath of the outbreak of violence in Israel (from October 6 to October 19, 2023), with prices closing in on the psychologically important $2,000 level.
Ray Dalio,9speaking at the Council of Foreign Relations CEO Speaker series, said of gold: “There is no sensible reason not to own gold other than you don’t know history or the economics of it.”10
1 Hamas is a political and military organization that governs the Gaza strip of Palestinian territories that shares a border with Israel.
7 Bloomberg data ETF gold holdings 4/1/2022 to 10/16/2023
9 Ray Dalio is the founder of Bridgewater, a large Connecticut based hedge fund.
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