Potential Political Catalysts for Gold to the Upside
That is not to say however one should not prepare for the future. Analysis of potential scenarios is a sensible part of risk management. Indeed, after what has seemed like a tumultuous few years in politics it worth imagining some events that could happen that may drive the price of gold higher.
Death of a US President
Dramatic as it sounds this is not as implausible it initially appears. Both candidates in the 2020 US Presidential election are in their 70s (Biden 77, Trump 74). What would a President Pence or Harris look like? What would their policies be? What would change and what would stay the same? How would they react in a crisis? Who would be their advisors? The transition from Roosevelt to Truman towards the end of WWII made the dropping of the nuclear bomb much more likely. It matters who is in charge. While this is an extreme scenario serious investors consider all possibilities.
Invasion of Taiwan by China
Often feared but has never seemed plausible until recently. Such a move would draw international condemnation and almost certainly lead to sanctions against China being discussed. Would China care? As seen in Hong Kong China is increasingly confident on the global stage and has no desire to play second fiddle in a US –led 21st Century. It wants this century to be the Chinese century. Would Western dependence on China enable it to do this? How would other Asian countries respond? Especially pertinent would be the response of Japan and South Korea. Would such a move create a risk of a wider conflict?
War Between India and China
Again, this issue has been bubbling under the surface for a while and has recently heated up. While the issue pivots on the border dispute, the underlying themes are clear. Both India and China are emerging powers, not only regionally but also globally. They are also both nuclear powers with the world’s two biggest populations. Both seek to dominate and influence their near abroad and both have ambitions to play a larger part in world affairs. How localised could such a war be kept? What would the West do? What could the West do? What would happen to gold demand of two of the biggest gold consumers (and China the world’s biggest producer) engaged in a conflict? How would this affect the world economy?
Dictatorship in the West
Again, it seems absurd but the current posturing from the current US President has opened up this question. Both candidates are accusing each one another of potentially trying to steal the election. It is without a doubt that left and right across the West are more polarised than in any time since WWII. Civil debate and respect for another’s political views are a rarity. Newspapers publish articles that are fact –checked by social media companies and then censored. Add this to rising inequality and stagnant wages and the mix is prime for a leader to emerge who breaks the traditions of democracy and peaceful transition of power. Democracy is a fragile construct that depends on consent, tolerance, respect and civil debate. Looking at the current situation it can certainly not be ruled out entirely that some systems feel the pressure of more malign political forces and slowly slip toward less democratic systems or even full-blown dictatorship eventually.
The political pressure to reduce carbon emissions shows no sign of abating. Even China has now signed up to reducing its emissions and a Biden presidency will certain ratify the Paris agreement. Therefore, what are the effects on gold and the more pertinently the gold mining industry? Will costs of production increase? Will smaller miners be put out of business due to failing to comply? Will gold have to be certified as carbon neutral through some sort of carbon offset scheme? What about the supply chain and other service providers to gGold miners?
Additionally, the current ECB president made climate change a priority of her presidency. What does this mean for monetary policy? Does this mean carbon –neutral companies will have a lower cost of capital or be eligible for ECB asset purchase programmes compared to those who are not? What does climate change policies mean for the transport of gold? If the cost of Gold increases will there be so many companies mining it? How does that affect an already limited supply and thus the actual gold price?
These thought experiments are useful tools to imagine a world that doesn’t exist or may not ever exist. But by using one’s imagination, if these events or similar happen you are already a step ahead of many others.