President Donald Trump has thrown gold’s true believers a lifeline.
Trump’s inflammatory statements and tweets on some of the most sensitive areas of foreign policy — notably North Korea and Iran — have raised risk dramatically on the international stage. And by that I mean the risk of war, even nuclear war.
I have no idea if Trump or his children Donald Jr., Eric, or Ivanka own any goldGCZ7, +0.04% or gold stocks, but Trump is the biggest friend gold bugs have had since President Richard M. Nixon suddenly “shut the gold window” and ended convertibility of the U.S. dollar DXY, +0.01% into gold on Aug. 15, 1971.
This column has been negative on gold for a long time. Since the yellow metal peaked above $1,900 an ounce in August 2011, I’ve written that it is in a secular (long-term) bear market, which could go on for years and send prices much lower than the current $1,275.
Why? Because the dollar is still pretty strong and the U.S. economy is in decent shape — with inflation so low even Federal Reserve chairwoman Janet Yellen can’t find much of it. And as the Fed raises interest rates gradually and begins to reduce its $4.5-trillion balance sheet — a process that may speed up if Yellen is replaced — the rationale for owning gold has in fact become even weaker.
Perennial gloom-and-doomers like Peter Schiff, whose prediction gold would hit $5,000 an ounce I labeled one of the five worst investment calls of the 21st Century so far, have looked more and more wrong.
Enter Trump. Rather than calm tensions, as every president before him has tried to do, Trump is pouring gasoline on every fire. He has repeatedly called North Korea’s leader Kim Jong-un, who seems dangerously unstable, “Little Rocket Man,” as if he were still baiting Sen. Marco Rubio in the 2016 Republican Florida primary.
He has threatened to rain “fire and fury” down on North Korea and in a speech to the U.N. General Assembly last month warned he would “totally destroy North Korea” if it continued to threaten the U.S. and its allies. North Korea’s foreign minister said the president’s words constituted a “declaration of war.”
And whenever anyone in his administration tries to reassure the world that U.S. policy is tough but reasonable, the president himself undercuts him. This past weekend, Secretary of State Rex Tillerson said in Beijing the U.S. has “’lines of communication to Pyongyang.’” Within a day, the president publicly humiliated the hapless Tillerson by tweeting he was “wasting his time trying to negotiate” with Kim, saying “We’ll do what has to be done.”
So, if diplomacy is a “waste of time,” what then “has to be done”? War, it seems, isthe only remaining alternative.
And even as North Korea moves closer to being able to dispatch nuclear-armed intercontinental ballistic missiles to the U.S. mainland, Trump is trying to undermine the diplomatic agreement that has kept Iran from becoming another rogue nuclear power.
Trump has called the Iran nuclear agreement “one of the worst and most one-sided” agreements ever, and “an embarrassment” to the U.S. He has often said he would declare Iran out of compliance with that accord even though his own administration has certified the Islamic Republic’s adherence to its terms.
So, just as the confrontation with North Korea is heating up, the president seems to be creating a new one with Iran — a two-nuclear-crises-for-the-price-of-one bargain he just can’t resist. “If the deal is scrapped, the Iranians could resume their centrifuge enrichment program, which is currently being monitored” and haveenough nuclear material for a workable weapon within months, wrote Jeremy Bernstein, an expert on Iran’s nuclear program.
To be sure, several previous presidents didn’t stop North Korea’s weapons program, mostly because they were unwilling to sacrifice maybe hundreds of thousands of Korean and Japanese lives to take out the Kim regime. This president apparently has few qualms about that. He looks hell-bent on war.
This president’s fragile ego and absolute, unchecked power to use the vast U.S. nuclear arsenal has raised the risk of war.
Which brings us back to gold. This president’s fragile ego and absolute, unchecked power to use the vast U.S. nuclear arsenal has raised the risk of war far more than Wall Street or Trump’s lemming-like supporters would ever admit. I still think the chance of war on the Korean peninsula is 25%-50%, but I’m raising the prospect of nuclear war in Asia to 10%-20%.
Gold won’t protect us — or especially South Korea or Japan — from the full impact of any war, which would be cataclysmic, and I hope and pray I am wrong. But when risk is rising, you need insurance, so taking some profits on your stocks and putting at least 5% of your holdings into physical gold or ETFs (I own a similar position of the SPDR Gold Shares ETF GLD, +0.28% ) would seem prudent right now. Because with this reckless president, all bets really are off.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing , which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.