Does the Obama administration accusation of Russian hacking risk starting a renewed cold war?

By Tony Termini

 

According to the White House Press Office, President Obama received a classified report on Thursday regarding possible “Russian meddling in U.S. elections.”

The report comes a week after the President ordered the closure of two Russian “compounds” in New York and Maryland and the expulsion of 35 Russian “diplomats” from the country.  Whether or not the report identifies a “smoking gun” proving Russian involvement in the hacking is at this point likely a moot point.  The Obama reprisals are water under the bridge.  What’s important now is that the situation doesn’t get any more stressed.

The risk of a renewed cold war between the United States and Russia already exists.  And, this is the case even as Present-elect Donald Trump downplays the seriousness of the accusations and possibly even the validity of the intelligence behind them.  Unfortunately, Trump’s opinion in this matter may not even matter

Both Democratic and Republican lawmakers agree that Russian intelligence activities in the U.S. need to be addressed and that renewed sanctions ought to be part of the country’s response.  However this plays out, it could get messy.  And, given Mr. Trump’s unorthodox approach to politics – and his unpredictable nature – the degree of messiness is yet to be determined.

For investors, all of this could pose problems.  Wall Street doesn’t like uncertainty and it absolutely abhors political messiness.  Perhaps you’ll recall the worldwide market correction that took place after the Brexit vote last June.

So, perhaps now is a very opportune time to consider adding gold to portfolios.  And, history has proven that this could be a savvy play for investors.  Here’s why.

The Cold War between the United States and the former Soviet Union lasted some 44 years, between 1947 and 1991.  During that time the S&P 500 provided stock investors with a compound annual growth rate (CAGR) of 3.59%.

(Data and Chart Source: MacroTrends.com)

 

In comparison, investments in gold over the same 44 year period offered a CAGR of 4.90%.

(Data and Chart Source: MacroTrends.com)

 

To put the 1.31% difference between the return on gold and the return on stocks into perspective consider this.  One thousand dollars invested in gold at the beginning of the Cold War would have grown to $8,205.81 by the time the Cold War ended in 1991 – better than an eight-fold increase in value.  On the contrary, had an investor kept that same one thousand dollars in the stock market, the investment would have grown to just $4,720.46 – just a few hundred dollars more than half of what gold returned.

Okay, in fairness, that was a long time ago and U.S./Russian relations have gotten a lot better since 1991.  Yet this is not the first time that the two superpowers have had issues over spying.  And, such issues do tend to make the stock market nervous.

The Obama administration contends that meddling in a U.S. election goes beyond the pale of the type of run-of-the-mill eavesdropping the two nations have been conducting on one another for the better part of the last 100 years.  Yet, Russian President Vladimir Putin categorically denies his country’s involvement.

So did Dwight Eisenhower in May of 1960 when the Soviets shot down an American U-2 reconnaissance plane flying over their territory.  At the time, the U.S. denied the flight had been a spy mission and said that the U-2 was merely a weather plane.  Unfortunately, when the Soviets produced pilot Frances Gary Powers as proof that President Eisenhower had lied, things got a little sticky.  The incident fostered a level of mistrust so profound between the two nations that by October 1962, the Soviets were installing medium-range ballistic nuclear missiles in Cuba (Source: U.S. Department of State Archive).

I’m not suggesting that the current flap is likely to lead to a modern day corollary of the Cuban Missile Crisis.  But, it is noteworthy that Russian foreign policy does fly in the face of American interests overseas.  But, no one should be surprised by this.

In an interview with Wolf Blitzer in 2012, Mitt Romney said that Russia is “without question our number one geopolitical foe… when countries such as Iran and North Korea cross the line…when Assad…is murdering his own people…who is it that always stands up with the world’s worst actors?  It’s always Russia” (Source: The Wall Street Journal).

When one tosses in the fact that the incoming President currently takes a seemingly much less “hawkish” approach to Russian mischief than many in Congress, it is impossible not to wonder what could go wrong.

Trump and Putin may indeed rekindle the “bromance” they seemed to enjoy during the 2016 Presidential campaign.  On the other hand, they may not.  Affairs of state require delicate finesse.  Here words matter.  And, a 3:00AM Tweet-rant could be construed badly.

So, in an environment that has seen financial assets rise in value some 14% in the last twelve months, much of that coming just since the election, my belief is that the market is priced for near perfection.  Any little disturbance could knock it off course.  A serious hiccup in world affairs could do worse.

As a result, I stay firm in my belief that some exposure to gold in a well-balanced, diversified, durable investment portfolio makes sense.

Will your portfolio weather the next financial crisis?

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