Gold, Guns, and Natural Disasters

Before a forecast tropical storm, residents of a coastal floodplain keep one eye trained on the weather as they go about their daily business.  

Wary investors keep an eye out for potential political, geopolitical, as well as natural disasters.

Homeowners on the Gulf of Mexico take precautions against the potential for wind and water damage, as do market-minders seek indemnity from inflation and recession, up and down markets, changing tax policy, and potential for catastrophe. 

When the homeowner has to decide whether to shelter in place or flee, the potential storm refugee gathers those items of most lasting personal value.

Investors, in a time of impending economic, political or natural disaster, gather those assets with most permanent purchasing power.

On Friday, September 8th when the market closed at 4:00 o’clock Eastern Time, Hurricane Irma was a category 5 storm off the coast of eastern Cuba heading due west with a predicted storm track centered on Miami, Florida.

Losses to property insurers in Florida were projected at $130 billion, more than enough to affect the principal half of the $26 billion in “catastrophe bonds” issued by reinsurers to spread their risk (WSJ 9/8/17).

That day gold traded at $1351.20 per ounce, up from $1165.70 at the end of 2016. On that eve of Hurricane Irma, the ten-year US Treasury traded with a yield of 2.061%, down from 2.446% (yield moves down as price moves up) on the last day of December (MarketWatch.com). As speculators estimated losses from a historic storm that had not yet made landfall, gold and bonds hit their high prices of the year.

Gold and US Treasuries are the global standards as safe havens in times of crisis.

There are those investors who keep gold locked safes bolted to their basement floors, but they are not the investors that move the gold market.

The investors who have the power to impact the price of gold are not human, but computers trading as they were programmed to.

Gold serves as a baseline for comparison in currency trading, it cannot be fabricated like diamonds, cannot be imitated or reinvented like Bitcoin, cannot be printed or issued without limit like paper currency and bonds.

Gold’s natural elemental rarity establishes its value. There is a finite amount of gold on and in the Earth.

As the population of the planet continues to increase, livable land, drinkable water, and the amount of gold available to each person alive decrease. Gold will have value when real estate, stocks, bonds, and dollars do not.

When all securities drop in unison as they did during the crash of 1987, gold purchases catch the proceeds of their sales.

After acquiring a safe-load of gold, an individual investor needs a gun to protect his vault from invasion by roving marauders after the apocalypse.

But individuals on guard in their basements control as few of the guns on the planet, as they do little of the gold. The most powerful governments control most of the weapons. The United States is the largest economy with the most powerful military, and it borrows money in the form of United States Treasury bills, notes, and bonds. Gun-backed-bonds are another option for institutions looking to ensure against potential catastrophic events.

Most important to an institutional investor is not the accuracy of forecasts of impending doom, rather, who believes them, how many hold that belief, and under what circumstances they would choose to act. Members of the financial herd watch for signs of anxiety in order to gauge the probability of a stampede. That probability is then translated into a number, and that number is used to calculate the percentage of an investment portfolio that must be absolutely safe.

Gold and US Treasuries have trended up in price this year (see chart)

Source: MarketWatch.com

as potential disasters have appeared in the media and have been amplified by social media.

High expectations for the new government of the United States were dampened with doubt when Congress was unable to quickly repeal and replace Obamacare.

Fear crept further into the collective consciousness as North Korea ramped up their production and testing of missiles and nuclear bombs. Storms of heretofore-unknown wind-speed and size brought their fury to the Southeastern United States.

But crisis for some means opportunity for others. 

The more times a story is repeated the more it changes.Texts, tweets, and posts become less precise recitations of the original story as they are forwarded, re-tweeted and re-posted.

The prevalence of alternate interpretations, abbreviations, and outright fictions creates uncertainty, and uncertainty is bad for markets.

“Buy the Rumor, Sell the News,” goes the Wall Street saying, and the rumor mill has undergone a thorough technological upgrade.

It is not the news that moves the markets. Markets are moved by the anticipations, speculations, and predictions of an unknowable future. 

The less is known, the more room there is for speculation, and when speculation is repeated often enough, some will come to believe it as fact.

Those first converts then make believers out of others with newly inspired urgency. Those that believe make others believe and that ripple effect becomes a wave, then a storm that propels the market before it.

Tracked by satellites and broadcast worldwide, a forecast of the storm’s impact begins to carry the weight of fundamental fact.

The future is captured in a net of numbers cast at least wide enough to take in all possibilities, then trades are placed, and bets are made based on those projections.

Like the cones on a Caribbean weather map try to predict the direction of a hurricane from its current position, so do forecasts of impending doom, include the extremes of consequences.

Someone makes a guess; someone else repeats it as if it were a fact. Rumors start like insignificant squalls off the coast of Africa that gain strength over warm water as they travel westward.

But the path of the storm always changes, and those fleeing before it can find themselves repositioned directly in its final path.