The neuro-behavioral science trading edge
Gold prices and terrorism
- Vijay L Bhambwani Nov 14, 2014


Much has been written about Gold (and Silver) in the last few quarters, second guesses about the price direction flying thick and fast. Substantial amount of real estate in cyberia has been occupied with opinions, fundamental research, price based research and everything else, even astrology. Bear with me as I present another dimension, which I had put forth in my newspaper column a few years ago.

For Gold bugs (for the want of a better word), the world changed on 9/11 as mainland USA came under attack. Along expected lines, the US administration clamped down on currency remittances, both inbound and outbound. The idea was to regulate the money flow and identify terror networks and choke their funding resources. However, any government, in any part of the world cannot totally eradicate human traffic, smuggling of arms, narcotics, bullion and traffic of terrorism among other illegal activities. The one thing common to all these services is money. All of the above have to be paid for. In an increasingly regulated environment, paid at a premium, for availability is scarce. Paid with a currency that is universally accepted and uniformly trusted and valued. Enter Gold, the new defacto currency of the world of terrorism. As the fear factor rose, the value of Gold rose, aided in no small measure by terror attacks. The more the value of Gold appreciated, the more the valuable became the "reserves" of terror networks, because their "reserve currency" was suddenly worth a whole lot more. Take things in perspective, Gold quoted -

$ 275 prior to 9/11,
$ 323 in 1 year,
$ 385 in 2 years,
$ 418 in 3 years,
$ 468 in 4 years,
$ 640 in 5 years,
$ 745 in 6 years,
$ 920 in 7 years,
$ 1023 in 8 years
We dont need to remind ourselves that the capability of the terror networks to do damage to society grew geometrically as the value of it's "currency" soared. Also, the quantum of currency charged for say, a AK-47 also rose as counter terrorism grew more stringent. What happened? The value of a grenade that was hypothetically quoted at 2 gold sovereigns went up to 5 gold sovereigns and the value of the gold sovereign itself appreciated ~ 400% in 8 years (higher in few more years). What was happening to the average government in the interim? There was a crash in their economies, budgets were cut, police forces, fire departments, municipalities and armies suffered retrenchment, freeze in arms procurement, materials upgrades and social security and safety fell sharply. The world became a very nervous place in the last decade or so. It sent Gold prices flying higher. I took a friend sight seeing around the British administrative areas of pre independence Mumbai, the Churches, the docks, the load bearing structures, the infrastructure the British built. At many places like the Ferry Wharf (a glorified fishermens market on a Sunday morning and of no strategic / military importance), we were not allowed to click snaps of men & women hawking fish at the sea shore because it could (in the words of the on duty sub-inspector), endanger coastal / national security! There were written orders, after the 26/11 attack on Mumbai, not to permit suspicious recon activities. The sense of fear was alarming. Same with the Sassoon docks, Navy Nagar et al.

To return to Gold, the prices are falling for somewhat the same reason that Crude oil prices are falling (along with other obvious reasons ofcourse!). Lower crude prices impact the terrorists' bottomline because they are selling oil from captured wells (their cost being almost zero) at below market prices. Falling Gold prices hits the terrorists "reserve currency" and their capability to inflict damage on society as well. Meanwhile, the legitimate economy is showing signs of having seen the worst. While a total recovery and boom times maybe years away, the capability of governments to protect and secure it's citizens, their borders and social security cant fall much from these levels. If fear levels fall, nervousness recedes from the high risk financial assets, Gold prices might ease more. At the same time, debasement of fiat currencies, artificial guidance of prices may work in the near term, but will come to bite the actors-in-concert at a later date (watch the post 2016 US presidential year for guidance).  The never ending cycle of peaks and troughs will persist long after we are gone. Watching the Swiss referendum in Nov 2014 is another data point of interest to me as the Swiss citizen is pushing for a gold backed currency, rather than store the worlds currency in their bank vaults. I am not making a case for buying into paper assets or even hard assets, that is your individual call. But there is another side of the coin, where falling Gold prices are concerned, which is being largely ignored by market watchers in my humble opinion. Do spare a thought along these lines. As a maxim in behavioral science goes - there are 3 sides to the truth - your version, my version and the actual truth. Consider as many dimensions as possible before you deploy your money.
Where do I stand where Gold is concerned? No where. I am biased in favour of Silver as a long term investment instead.

Vijay L Bhambwani