Geopolitical risk can refer to a number of threats and disruptions that alter the political and
geopolitical climate, such as wars, border disputes, mass migrations, and trade and security
disputes. These issues in turn can impact on global or regional trade, capital flows and the
financial system in unpredictable ways and so lead to heightened uncertainty and less clarity about the future.

Geopolitical risk also encompasses oil and gas supply shocks, the rise in power of new economies, the risks from unexpected election results and power changes – especially within emerging economies, and even the waning power of multilateral institutions as individual countries engage in bilateral agreements and deals to the exclusion of existing international arrangements.

For example, there is speculation that the UK may hold a referendum on EU membership in the coming years with a view to either remaining in the European Union, or exiting it. If the UK population voted to exit the EU, this would have serious repercussions for Ireland since Great Britain and Northern Ireland are the largest trading partners of the Republic, both for exports and imports. A UK exit from the EU would adversely affect trade and customs relationships between the two economies and could severely affect economic growth in both areas.

Geopolitical events can and do occur without warning and sometimes have devastating effects on seemingly unconnected economies due to an increasingly interdependence global economy. Geopolitical risks are also increasing in frequency, again due to increased global interdependence. When uncertainty rises, financial markets become stressed, and investors manage the heightened risk via a ‘flight to quality’ i.e. a move into real assets that are known to preserve purchasing power and that act as currency or inflation hedges.

Gold is one of the main beneficiaries of this flight to quality. Gold is a finite asset, and is no one else’s liability, it has no counterparty risk and no default risk, and it is universally accepted as a high quality asset when the value of other financial assets becomes questionable. These characteristics make gold the ultimate safe haven asset.

During periods of market turmoil the gold price tends to increase as other financial asset prices are falling. When Irish investors own gold, it provides a degree of wealth protection from geopolitical risk and a level of financial insurance from the system and its accompanying risks.

GoldCore has always maintained that Irish investors should hold a properly diversified investment portfolio. This diversification should include a modest allocation to assets which protect portfolios in times of heightened market turmoil. Substantial academic and financial sector evidence exists to demonstrate that a modest portfolio allocation to gold bullion can greatly reduce the negative returns on portfolios of unexpected geopolitical events.

Monetary risk refers to a set of risks that may alter the existing monetary system.

In Ireland, the monetary system is made up of the Central Bank of Ireland acting in consort with the Irish commercial banks, but the Central Bank of Ireland is also a member of the Eurosystem, having shared statutory authority with the ECB to create Ireland’s money supply.

The Irish commercial banks augment this supply through fractional reserve banking and credit creation. The Irish monetary system as part of the Eurozone, then interacts with other economies and currency zones to create the international monetary system.

When external risks arise such as geopolitical risk, systemic risk or macroeconomic risk arise, the ECB are forced to alter monetary policy, sometimes in extreme ways, which can have the effect of radically altering the monetary landscape that investors have previously taken for granted.

When the global financial crisis hit in 2008, central banks around the world feared that the
international monetary system would collapse so they coordinated on implementing monetary policy changes. These changes are still reverberating around the world today, because the problems were not fixed, merely postponed.

Since 2008, major monetary authorities such as the US Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan, have embarked on near zero interest rate policies, debasement of their currencies, and in some cases they have embarked on quantitative easing by buying their country’s treasury bonds. This affects Irish savers who, instead of being rewarded for saving, are now being penalised by the ECB due to the ECB’s negligible interest rates.

When the Irish banking system nearly collapsed during the banking crisis, there was a real risk that Ireland could have been forced to leave the Eurozone. This was a severe monetary shock to the economy and one which was never envisaged when Ireland joined the Euro just 10 years previously.

This massive increase in global money supply has created potential inflationary risks, since the rate of inflation is, in a lot of cases, above the rate of return available on bank deposits, and the
expansion of the money supply has reduced the purchasing power of Euros.

The increased money supply has also generated asset bubbles in stock markets and in some cases property markets, such as our own property market bubble in Ireland and similar bubbles in the US and potentially, the UK.

Gold has been proven to be an inflation hedge and a hedge against the debasement in the value of paper currencies. As inflation rises, gold’s price also rises, and so it retains its purchasing power.

Gold is a monetary asset that will help protect Irish investors from monetary risks over the
coming years.

Gold bullion has long been held by investors seeking protect their wealth from the risks posed by systemic events.

Systemic risk refers to the possibility that the entire financial system could become unstable and potentially collapse. Normally a financial system is stable, and does not transmit shocks through the financial sector or into the wider economy. However, on occasion, the failure or potential failure of a financial firm or institution may create a domino effect and impact the health of similar firms.

Often, if investment or financing problems are perceived at a bank, the broader marketplace will not want to lend to that bank and perceived problems become real problems. If certain assets or investments in one bank become problematic, this can affect the value of similar assets at other banks. This is called financial contagion and can also be responsible for transmitting systemic risk.

These concepts are best illustrated by the events of 2007 and 2008 which most famously led to the collapse of US investment bank Lehman brothers in September 2008 and the earlier collapse of Bears Sterns, another US investment bank. Both banks experienced large losses on investments tied to US subprime mortgages.

This led to panic in the global interbank lending markets beginning around mid-September 2008, and the associated bailing out of US banks.

On a wider scale, banks around the world stopped lending to each other and wholesale money markets froze up, creating liquidity problems. Central Banks around the world had to flood the markets with emergency financing and take low quality assets as collateral in return to providing financing to banks.

However, since the interbank lending market is global, there was a systemic shock and Irish banks could not raise new short-term loans to cover their huge property lending exposure. This caused insolvency risk in the Irish banking sector and a fear of illiquidity for bank depositors.

The Irish Government then infamously stepped in during late September 2008 with their bank deposit guarantee deal to bailout the Irish banks to the tune of multiple billions, followed by the bankruptcy of the Irish finances which then had to be bailed out by the IMF and ECB. This is a classic example of a systemic shock from another market (the US), having a ripple effect on a separate market (Ireland) due to the global interconnectedness of the financial and banking markets.

The collapse of Anglo Irish Bank and the bailouts and restructuring of AIB, Bank of Ireland and Permanent TSB still left the surviving lending institutions with huge non-preforming loan exposure to the Small and Medium Enterprise (SME) sector. Like in the mortgage market, the Irish banks, in order to survive, were forced to contract credit and increase loan costs to the SME sector. This has had an extremely sever impact on the Irish SME sector which accounts for half of Irish GDP, and nearly 75% of Irish employment.

There is a view that the Irish banks are not accounting correctly for their exposure to the Irish SME sector. The problems with the Irish economy remain despite a return of some economic growth and the exit from IMF and ECB led borrowings.

The gold price rose strongly before and during this credit crisis. Before the crisis broke, gold’s price was bid up by the market in anticipation that these systemic risks were coming to the fore. During the crisis in late 2008, gold price’s performed well as it was correctly seen as a safe haven asset that would provide shelter from the market turmoil.

The problems from the 2008 crisis have never been resolved and are merely being papered over. Central banks continue to intervene to prop up bond markets via quantitative easing. Stock markets increasingly rely on the support and liquidity provided by these central bank interventions. There is still the risk of another Lehman moment, maybe increasingly so.

The crisis has continued and in 2013 in Cyprus in a watershed moment, the Cypriot government was forced to nationalise the banks which resulted in businesses not being able to access the critical functions of the banking system. Furthermore, depositors with balances over a certain threshold were penalised in the form of a bail-in tax.

EU sanctioned bail-ins as opposed to bail-outs may soon become the norm within the EU. The Irish economy is still exposed to these developments despite what some commentators may say. It is therefore prudent for investors to hold some gold as a portfolio diversifier and a hedge against future systemic risks.

For an investor, macro-economic or macro risk refers to unexpected changes in the value of their assets due to shocks to real economic growth.

This essentially means shocks from downturns in the business or economic cycle, in other words recessions, or in extreme cases, depressions. Since the global economy is interdependent, shocks to economic growth in the major industrialised economies would tend to be the most concerning, however, with the rise of emerging powers such as the BRICS, macro risk can also come from emerging economies.

The factors that create macro risk for investors would include real economy variables such as the unemployment rate, the health of the construction industry and industrial production, and also monetary variables such as interest rates and exchange rates. Macro risk factors can even include commodity price shocks such as oil or gold price changes.

In turn, these economic shocks can exist in the presence of inflationary shocks, so could lead to a recession accompanied by deflation, or high inflation, or even hyperinflation, or less likely but possible, a stagnant economy with high inflation, known as stagflation.

The Irish property bubble and its bust is a vivid illustration of a macro economic shock. Although there had been warnings from various quarters that the Celtic Tiger property bubble in Ireland would eventually pop, when the bubble began to unwind in 2007 and then burst in 2008, it was still an unexpected event for the majority. The bursting of the property bubble caused a macroeconomic shock across the country. The fall in property prices precipitated the Irish banking crisis, causing loan losses on all of the Irish bank’s loan books and making the banks essentially insolvent.

As property developers went bust, they froze and abandoned construction projects, throwing the Irish construction industry into disarray, and leading to high levels of unemployment in the construction sector and a knock on effect of reduced economic activity in lots of adjacent sectors and amongst suppliers to the construction industry.

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