Operation Rising Lion launched at 8 p.m. last night.
Two hundred Israeli aircraft executed 330 strikes on 100 targets across Iran. Nuclear facilities, missile production sites, and homes of senior military officials were hit.
Iranian general Amir Ali Hajizadeh was killed in the process.
We can now add war in the Middle East to the long list of risks to juggle.
Closer to home, we have a long weekend of heated protests ahead of us. Among a long list of other things, the protestors are unhappy that an administration determined to cut government waste can somehow find $45 million in the budget for a parade that happens to fall on the president’s birthday.
Given that we’re running a deficit of $2 trillion already, what’s another $45 million among friends? Just add it to the tab.
And if that wasn’t enough, we also have President Trump and California Governor Gavin Newsom duking it out in court over who’s in charge of the California National Guard.
Just another day in the Age of Chaos.
There’s not really an investment rule book for this. But there is a way to invest in this environment. So in today’s Navigator, let’s discuss what to do now to ensure you’re protecting your wealth… and growing it too.
Focus on the Big Picture
Last night, when the news of Israel’s bombing campaign broke, the reaction in the afterhours futures market wasn’t surprising.
Stocks were down about a percent and a half…
Gold was up about a percent and a half…
And crude oil was up big, around 10%.
But here’s the thing.
Focusing on headlines like these – even though they are serious and concerning – misses the bigger picture.
You don’t buy gold because the Middle East is on fire.
You buy gold as a long-term store of value and as a hedge against dollar devaluation.
When Saddam Hussein’s Iraq invaded Kuwait, gold prices spiked. Within about five days, the price of the yellow metal had risen about 10%. At its wartime high, gold peaked about 15% higher.
By the end of the Gulf War, gold had given up virtually all of those gains and traded back at pre-invasion levels.
Likewise, the 1983 bombing of the U.S. Marines barracks in Beirut, which killed 241 servicemen, had no lasting impact on gold prices.
Neither did the 1987 Palestinian intifada or the 1988 Iran-Iraq war. And that was particularly bloody. Between 500,000 and 1 million people were killed.
None of these crises in the Middle East had any lasting impact on gold prices.
And with the exception of Saddam’s invasion of Kuwait – which led to a market correction of about 17% – none had much of an impact on the stock market.
There were two exceptions…
The Yom Kippur War that started in 1973. Egypt and Syria launched a surprise attack on Israel, inflicting major damage. Between 1973 and 1974, the S&P 500 shed 48%.
Gold prices ran up 39% following the onset of that war.
And George W. Bush’s 2003 Iraq War saw both stocks and gold shoot higher through the year. Gold rose about 20% that year, and the S&P 500 rallied more than 26%.
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Then as Now
It’s simple.
In the 1980s and 1990s, inflation was falling.
It was the Great Disinflation.
Gold tends to perform poorly when inflation is low and falling and confidence in the dollar is high.
Compare that to 1973 or 2003. In both cases, gold was in an established uptrend that would ultimately last for years.
The Middle East wars were irrelevant to the price of gold. War or not, there were other forces pushing the yellow metal higher.
In the 1970s, that force was rising in inflation and a lack of faith in the dollar following the final collapse of the gold standard.
In the early 2000s, gold benefitted from a general rediscovery of hard assets following the bursting of the 1990s tech bubble.
Now, consider our situation today.
Gold has been trending higher for years thanks to a renewed crisis of faith in the dollar.
So, should you still buy gold today?
Absolutely.
But if you’re looking to invest new money, you might want to average in, making a series of smaller additions over the course of several weeks. That way you benefit from any short-term dips following the end of hostilities.
Chaos is scary. But it’s stuffed with opportunity. You just need to look beyond the headlines and keep reading Navigator.
To life, liberty, and the pursuit of wealth,
Charles Sizemore
Chief Investment Strategist, The Freeport Society
