Gold and Silver turn higher on geopolitical concerns

European markets have brushed aside any geopolitical concerns to move higher in early trade today. The US invasion of Venezuela and subsequent capture of Maduro has served to highlight the ongoing case for defence stocks, with BAE Systems (4%), Rheinmetall (+7%), and Thales (3%) surging higher as traders weigh up the possibility of similar action elsewhere in the world. From the perspective of the US, Trumps insistence that they will control their hemisphere puts particular pressure on the Brazilians given their stature as one of the core BRICS nations. Meanwhile, the President has already warned that Mexico and Colombia could face military action if they do not stem the flow of illegal drugs, stating that “Operation Colombia sounds good to me.” Finally, Trump has expressed a desire to overturn the Cuban regime, warning that this could happen naturally as they put an end to the flow of Venezuelan oil money into Cuba. For traders, this means not only a heightened prospect of additional military action and regional instability, but also an emboldening of countries such as China that could see this as a green light to take the likes of Taiwan to control their own hemisphere.

Notably, we have seen oil prices rise despite the prospect of a sharp rise in Venezuelan output as US companies invest and expand operations in a country that boasts the highest oil reserves in the world. However, the reality is that we could see a sharp decline in Venezuelan output over the near-term, with Trump effectively shutting down the shadow fleet trade routes that have seen oil flow to the likes of China over recent years. While Trump claims to run the country, it will likely take time to even organise the oil industry to start exporting into US refineries, while the potential to ramp up output will invariably take years given the crumbling infrastructure and lack of investment under Maduro.

With Trumps actions setting a dangerous precedent over the extent to which the worlds largest nations need to respect their neighbour's sovereignty, it is unsurprising to see gold on the rise once again today. After all the pushback over the Russian invasion in Ukraine, Trump has shown his hand as someone that will similarly take military action against their neighbours if he deems it of strategic importance. This opens us up to additional geopolitical tension and volatility, with Trumps willingness to plunder Venezuelan resources signalling additional risk for nations investing into US assets. While some see this move as one which could lessen the US debt, the immediate risk to global stability means that gold and silver once again enjoy a fresh bout of buying pressure.