The Commodity Investor: Gold & Oil To Spike Amid Worst Geopolitical Crisis Since World War II

September 02, 2014

Tensions are rising across the globe and commodities will benefit.

 

The geopolitical events of summer 2014 may go down in history as a decisive turning point in world affairs. Tensions across the Middle East and the European continent are reaching a high point and may soon reach a point of no return.

In this report, we examine the global macroeconomic scenario and what impact this will have on the performance of commodities. This will allow us to pick our investment spots as we move into the final quarter of the year.

Tumultuous Times In Europe

A storm is brewing in Europe and the Middle East that could drag the world’s superpowers into regional conflicts that could escalate into a much broader war encompassing several countries across several continents. Let’s start in Europe.

The last time events similar to those in 2014 happened in Europe were right before the outbreak of World War II in the late 1930s. In the summer of 2014, Putin-led Russia annexed Crimea, a province that had been part of Ukraine for decades.

The annexation took most of the international community by surprise, as much by its speed as by its effectiveness. Almost overnight, Russian troops entered the Crimea, and Moscow declared it a part of the Russian Federation. The annexation was so swift and complete that a few months later, Vladimir Putin signed a law legalizing gambling in the Crimea.

The response from NATO countries was to issue warnings and targeted sanctions against Russian individuals and companies. Those sanctions seem to have done nothing; in fact, the situation has only deteriorated since then.

During the last week of August, Russia sent 1,000 Russian soldiers into Eastern Ukraine, well inside Ukraine’s international recognized borders. This 1,000-man army came in with tanks and antiaircraft and heavy artillery military equipment.

Furthermore, Russian-backed militants have been inside of Eastern Ukraine for some time now. These militants shot down a Malaysia Airlines civilian aircraft that was flying from the Netherlands to Malaysia, claiming more than 200 victims.

The response from NATO has been to increase sanctions which, in a previous column, I argued didn’t have any real teeth and would do little to spur a change of behavior from the Kremlin.

The rhetoric has become so heated that Vladimir Putin explicitly warned to “not mess with Russia” because of its status as a nuclear power with thousands of nuclear warheads at its disposal.

 

 

Continuing Troubles In The Middle East

While tension is increasing on Europe’s eastern borders, troubles in the Mideast are also continuing. There are so many regional conflicts that it’s quite hard to decide which one to begin with, or which one is more important.

Let’s start with the conflict that garnered the most international media attention. The Israeli-Palestinian conflict reached a dangerous point in the third quarter of this year as fighting erupted in Gaza. Israeli warplanes pursued a campaign of heavy bombardment into the Gaza territory, while Hamas-led fighters attacked targets inside of Israel.

In the meantime, the conflict in Syria only continued to escalate; so much so that the United Nations now estimates that there are more than 7 million Syrian refugees in a conflict that has claimed hundreds of thousands of lives. At the same time, rebels in Libya have continued disrupting oil supplies amid continued civil strife. Iraq is no better, as fighting has erupted between Sunni and Shia.

Troubles in the region are so high that the United Kingdom raised its threat level to “severe,” meaning a terrorist attack on British soil is “likely” as a result of all the regional infighting. Amid the backdrop of all these regional conflicts has been the rise of the terrorist organization ISIS, which is wreaking havoc across the Mideast, and which many are now calling Al-Qaeda 2.0.

What To Do

Aside from a full-fledged world war, the global geopolitical situation could not be bleaker as we move into the fourth quarter. The United States, which has played the role of regional policeman since the end of World War II, decided to retreat from its traditional posture in world affairs earlier this year when it did not act in Syria and allowed events in Eastern Europe to escalate. That policy is now under urgent review as these regional conflicts threaten to push countries into a heightened global conflict.

The bottom line is that the geopolitical situation is very bleak, and this will have a direct impact on markets, economies and commodities. As the situation continues to escalate regionally and globally, I expect investors to pile into gold. Gold has stabilized in recent months and may hit $1,400 per ounce in the coming weeks. Investors still see gold as a safe-haven asset, especially during times of conflict.

I also expect oil prices to increase as regional conflicts create supply-side disruptions in major producing countries such as Iraq, Libya and even Algeria. While demand from Asian countries remains robust, supply is being curtailed due to armed conflict, and this will push prices higher. In this geopolitical storm, investors can find save haven in traditional hard asset commodities.

 

Disclosure: The author doesn’t have any positions in the stocks mentioned.


Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. He can be reached at [email protected].


Find your next ETF

Reset All