Gold, Oil, and Why the Market Doesn’t Care About Geopolitical Events

Between Ukraine and ISIS, 2014 has been a year marked by geopolitical tension. Yet, contrary to intuition, market volatility has continued to trend downward along with the price of gold and oil, while stocks continue to hit new all-time highs. Why? Jim Bianco, President of Bianco Research, provided a number of key insights in his recent interview with Financial Sense Newshour.
Why do you think gold and oil haven’t reacted to geopolitical events this year?
“Whenever there’s a geopolitical event, you have to ask yourself a simple question: Will this change the supply-demand outlook for the world economy? Will it mean we get less of something or will it change people’s attitudes about purchasing things? And sometimes those attitudes can be changed because we are applying sanctions or going to war or something along those lines. The thing about the current set of geopolitics is that the President himself has said that he wants to take a minimalist approach when it comes to Ukraine. The President went out of his way twice in press conferences in the last month to six weeks to say the sanctions were designed to not impact the global markets or the global economy. So, for things like the Ukraine, the President is saying to you it doesn’t matter… It is not going to change the supply of any products you get, the demand of any products you get, and we’re not going to put onerous regulations on banking or financial services or the energy sector because of what’s happening there – that’s why the market is ignoring it. When it comes to ISIS in Iraq, we’ve kind of taken the same approach: we’re not going to do a whole lot about it; they’re not near the oil fields so nothing has changed. So, that’s why I think from a geopolitical standpoint, these events aren’t resonating in the financial markets… Now, with that said…typically, when markets react, the first market reaction is the wrong reaction…at some point in the future the market is going to have an epiphany and say, “You know what, I got this wrong. Maybe this is a bigger deal than we think.”

This post was published at Silver Bear Cafe on September 20, 2014.