Geopolitical Tension Biggest Global Economic Stress

Fed Chair Powell sees risks to global economy from geopolitical tension as many use gold to diversify and hedge against this geopolitical uncertainty

Bullion.Directory precious metals analysis 27 October, 2023
By Isaac Nuriani
CEO at Augusta Precious Metals

Persistent inflation? The prospect of equally persistent higher interest rates?

That certainly would make sense. Here in the United States, inflation has stayed well above the Federal Reserve’s 2% target for the last 2½ years. And while price pressures have broadly relented over the past 15 months, they’re doing so very slowly.[1] So slowly, it seems, that consumers seem to be losing confidence in the idea that inflation will be reined in fully anytime soon.

According to one recent high-profile survey, Americans’ one-year inflation expectations recently rose from 3.2% to 4.2%.[2] The same survey revealed that nearly half the country believes high prices “are eroding their living standards.”[3]

As for interest rates, they’re largely a function of inflation. If inflation remains “higher for longer,” then we can expect interest rates to remain “higher for longer,” as well.

Policymakers at the Federal Reserve certainly think that’s the case. According to their latest Summary of Economic Projections, the benchmark federal funds rate – which is 5.33%, presently – still could be as high as 4.9% by the end of 2025 and as high as 4.1% by the end of 2026.[4]

But despite the ongoing risks to the world economy posed by ongoing inflation and interest-rate challenges, there now is another risk on the radar screen that experts suggest could be the most formidable of all through the foreseeable future: geopolitical tension.

In the wake of the Hamas attack on Israel, J.P. Morgan CEO Jamie Dimon sounded the geopolitical “alarm,” suggesting tensions are now sufficiently high to warrant concern about their impact on the global economy.

In fact, said Dimon, “This may be the most dangerous time the world has seen in decades.”[5]

Dimon said the continuing war in Ukraine and the Hamas-Israel conflict “may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships.”[6]

He’s hardly alone in his assessment of the geopolitical climate and what its possible implications for domestic and global economies. World Bank President Ajay Banga recently said that even as a number of other risks remain in play right now, he believes geopolitics represent the biggest risk to the global economy in the near term.[7]

“There is so much going on in the world and geopolitics in the wars that you’re seeing and what just happened recently in Israel and Gaza,” Banga said. “At the end of the day, when you put all this together, I think the impact on economic development is even more serious.”[8]

Like Jamie Dimon, Banga didn’t hesitate to use the “D” word in conjunction with his assessment of how the geopolitical and global economic landscape looks, overall, right now.

“I think that we’re at a very dangerous juncture,” he said.[9]

This sense of foreboding about the potential impact of geopolitical distress on the economy is not merely the province of singular, independent figures, as renowned as they may be.

The Federal Reserve, which tends to be less inclined toward public expressions of worry, recently highlighted its concerns about potential geopolitical threats to the financial system. And in a recent survey conducted by Oxford Economics, prominent in global economic forecasting and analysis, businesses now say they see geopolitical tensions as the biggest threat to the global economy.

This week, we’re going to take a closer look at what’s on the mind of the U.S. central bank when it comes to concerns about heightened geopolitical tension. We’ll also see just how seriously the business community is taking the risks posed by geopolitical distress.

But we’ll do more than that. Before we close out this article, we’ll discuss, as well, the manner in which geopolitical uncertainty can exacerbate economic uncertainty, and how retirement savers might potentially mitigate the impact of each/both.

There’s a lot to discuss this week; let’s get to it.

Federal Reserve Warns of Geopolitical Risks to the Financial System

Twice each year, the Federal Reserve publishes its “Financial Stability Report,” which is the central bank’s assessment of the stability of the U.S. financial system.

And in its just-released second report of 2023, the Fed makes clear that mounting geopolitical risks could affect the stability of not only the domestic financial system but the global financial system, as well.

The report carves out a section devoted to the discussion of how “a worsening of global geopolitical tensions could lead to broad adverse spillovers to global markets.” It references the Hamas attack on Israel as well as Russia’s persistent war against Ukraine specifically, but makes clear other sources of geopolitical discord could become problematic for worldwide economic growth and stability – including the price stability that the Federal Reserve and the rest of the world’s central banks have been working so hard to achieve over the last 18 months to two years.[10]

“The attack on Israel, in conjunction with Russia’s ongoing war against Ukraine, has ratcheted up geopolitical tensions,” the report notes. “These tensions pose important risks to global economic activity, including the possibility of sustained disruptions to regional trade in food, energy, and other commodities. Escalation of these conflicts or a worsening in other geopolitical tensions could reduce economic activity and boost inflation worldwide, particularly in the event of prolonged disruptions to supply chains and interruptions in production.”[11]

The report adds, “The global financial system could be affected by a pullback from risk-taking, declines in asset prices, and losses for exposed businesses and investors, including those in the US.”[12]

In his appearance last week before the Economic Club of New York, Fed Chair Jay Powell echoed the report’s updated emphasis on the risks posed by increased geopolitical distress, noting, “Geopolitical tensions are highly elevated and pose important risks to global economic activity. Our institutional role at the Federal Reserve is to monitor these developments for their economic implications, which remain highly uncertain.”[13]

The view that geopolitical risks are transitioning from being one significant issue affecting the good order of the global economy…to the primary issue …appears to be gaining traction quickly. Notably, it’s a view that transcends the perspective of policymakers in Washington, DC, and now is shared as well by businesses that have their boots very firmly planted on the economic ground.

Let’s hear from them next.

Businesses Now See Geopolitical Tensions as Biggest Threat to Global Economy

Several months ago, businesses saw economic distress, in the form of a sharp credit tightening or significant financial crisis, as the most prominent near-term challenge for the global economy.

Not anymore.

According to the third quarter 2023 Global Risk Survey conducted by Oxford Economics, it is geopolitical tension that businesses now see as the biggest potential issue for the global economy.

Jamie Thompson is the survey’s author as well as the head of macroscenarios at Oxford. The results of the survey “confirm,” as he puts it, the impressions that the nature of risks to the global economy have changed from those arising purely from underlying economic fundamentals to those stemming from geopolitical tensions around the world.

“Geopolitical tensions are now the main focus of concern, both in the near term and the medium term,” he noted. The survey found that 36% of businesses believe geopolitical tensions to be the most significant risks to the global economy.[14]

And those businesses see geopolitical tensions persisting as a major headache for years to come. According to the survey, more than 60% believe such tensions will remain a “very significant risk” to the global economy.[15]

“More than three-fifths of respondents view geopolitical risks as a very significant risk to the global economy over the medium term,” Thompson said, adding that “an intensification of geopolitical tensions could potentially trigger significant deglobalization of trade and the financial system.”[16]

The apparent shift to greater concern about geopolitical challenges to the economy underscores two important points, in my opinion. One is the capacity of geopolitical discord to exert a profound impact on the global economic order.

But it underscores something else: namely, the “width” and “breadth” of uncertainty.

That is, “economic uncertainty” does not exist solely as a function of the undetermined impacts of changes in domestic fiscal and monetary policy. Economic uncertainty is also a function of geopolitical uncertainty. Accordingly, retirement savers who seek to limit the impact of uncertainty on their retirement savings might think it prudent to consider if there are assets available that could help effectively diversify their holdings – even if the uncertainty they’re trying to mitigate is rooted in different catalysts.

Let’s talk about that as we close out this week.

Precious Metals Have Been Responsive During Periods of Both Economic and Geopolitical Uncertainty

The implications for retirement savers of a rise in the prominence of geopolitical tensions as a challenge for the global economy are hard to miss, in my view.

As “uncertainty” seems to become increasingly embedded in the economic landscape, it’s important to recognize the comprehensive character of that uncertainty.

Those seeking to limit the impacts of uncertainty might do well to consider that comprehensive profile and consider assets that historically have strengthened in the face of both “pure” economic uncertainty and uncertainty triggered by rising geopolitical tensions. One asset class that historically has thrived in both environments is precious metals.

One of the clearest and more recent examples of gold and silver responding favorably in a climate of significant economic uncertainty is the global financial crisis. From November 2008 through April 2011, the price of gold rose a little more than 100% and the price of silver soared 385%.[17]

But metals also seemed to thrive during calendar year 2020, which was heavily impacted by the effects of the global health crisis. Notably, the uncertainty generated by the pandemic was representative of much more than economic uncertainty; it was a complex event of both economic and geopolitical proportions.[18]

And metals responded. Gold finished calendar-year 2020 up 25%, while silver’s rate of appreciation was nearly double that.[19]

As for metals’ potential to be moved solely by geopolitical tension, there certainly is reliable evidence of that. Hamas attacked Israel on October 7. Since that time, gold has jumped 8% and silver has climbed nearly as much – 7.7%.[20]

Metals similarly spiked toward the beginning of Russia’s invasion of Ukraine. From the third week of January 2022, when NATO felt compelled to put troops on standby, through the first week of March 2022, gold was up about 9% and silver jumped 7%.[21]

The surge in metals prices that often occurs as a direct result of acute geopolitical tension tends to dissipate once those tensions are resolved. But the nature of the tensions referenced by Jamie Dimon, Fed Chair Jerome Powell and others is a little different. They’re speaking of a possibly broader, more protracted tension, one with the capacity to impact the global economy in a potentially more fundamental and longer-lasting way.

And, importantly, in a way that could exacerbate existing economic uncertainties – particularly those related to inflation and, consequentially, interest rates, the levels of which are determined largely by inflation rates.

In other words, in the estimation of a great many people, prevailing economic uncertainty may be in the process of becoming even more uncertain on the strength of coincident geopolitical uncertainty.

How, or even if, retirement savers choose to prepare their portfolios to withstand the array of possible impacts that could arise from such a multidimensional profile of global uncertainty is entirely their decision.

But those who do think it’s a good idea to proceed in that effort might find it particularly useful to consider assets that have, over specific moments in history, mitigated uncertainty fueled by economic and geopolitical drivers – together and separately.

[1] Bureau of Labor Statistics, “Consumer Price Index Archived News Releases” (accessed 10/26/23).
[2] University of Michigan Surveys of Consumers, “Final Results for October 2023” (October 27, 2023, accessed 10/27/23).
[3] Reade Pickert, Yahoo Finance, “US Consumer Inflation Expectations Jump to a Five-Month High” (October 13, 2023, accessed 10/27/23).
[4] Macrotrends, “Federal Funds Rate – 62 Year Historical Chart” (accessed 10/26/23); Megan Cassella, Barron’s, “Fed’s Dot Plot Points to One More Rate Increase This Year” (September 20, 2023, accessed 10/26/23).
[5] Jeff Cox, CNBC.com, “JPMorgan Chase CEO Jamie Dimon warns this is ‘the most dangerous time’ for the world in decades” (October 13, 2023, accessed 10/26/23).
[6] Ibid.
[7] Jorgelina Do Rosario, Reuters.com, “World Bank’s Banga says geopolitics pose biggest, but not the only, risk to world economy” (October 24, 2023, accessed 10/26/23).
[8] Ibid.
[9] Ibid.
[10] FederalReserve.gov, “Financial Stability Report” (October 2023, accessed 10/26/23).
[11] Ibid.
[12] Ibid.
[13] FederalReserve.gov, “Opening Remarks At the Economic Club of New York Luncheon, New York, New York” (October 19, 2023, accessed 10/26/23).
[14] Sumathi Bala, CNBC.com, “Geopolitical risks are a top global threat to businesses, survey finds” (August 2, 2023, accessed 10/26/23).
[15] Ibid.
[16] Ibid.
[17] London Bullion Market Association, “Precious Metal Prices” (accessed 10/26/23).
[18] Sudhakar Rajendran, EY.com, “Geopolitical risks arising from COVID-19 pandemic” (February 10, 2021, accessed 10/26/23).
[19] London Bullion Market Association, “Precious Metal Prices.”
[20] Ibid.
[21] Ibid.

This article was originally published here

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