By Mike Barrett
On May 6, President Obama passed a historically important milestone for which there was no fanfare or jubilation…
He has now been at war longer than any other American president.
With the end of his second term just weeks away, Obama will become the first U.S. president to have been at war for the entirety of his administration.
I see no reason to expect anything different for President-elect Donald Trump.
War is the most destructive and expensive thing that humans have ever devised. The consequences can be devastating to the individuals who fight and their families. It’s also true, however, that war is big business. Military contractors, like Lockheed Martin (LMT) and Raytheon (RTN), have thrived during the Obama administration. But war also has another beneficiary…
In the table below, notice how gold prices responded to increased war spending and federal budget deficits between 2001 and 2012 – and to the slowed growth between 2013 and 2016. (All figures are estimates.)
|Additions to Deficit|
|Change in Gold Price|
|Sources: The Balance; USgovernmentspending.com; StockCharts|
Between 2001 and 2016, war-related appropriations totaled $1.7 trillion. Around 65% of this was spent during the height of operations in Iraq and Afghanistan, between 2006 and 2012.
Two months ago, the Watson Institute for International and Public Affairs prepared a comprehensive analysis of war-related spending through 2016. Funds spent on battlefield operations are just a fraction of total war-related expenditures once medical-related costs, homeland security, and interest are included.
According to the institute, these additional expenses bring total war-related spending in Iraq and Afghanistan closer to a mind-boggling $4.8 trillion. That’s more than half of the $9 trillion added to the deficit since 2001.
The explosion in deficit spending triggered by these war costs absolutely pounded the U.S. dollar from 2001 to 2012. But it was also a powerful tailwind for gold.
It wasn’t until the federal budget sequestration went into effect in 2013, forcing across-the-board reductions in government spending (including the military), that the dollar began to stabilize. Gold, in turn, began to weaken.
Here’s the part of the story most investors don’t yet appreciate: The budget sequester has been a disaster for our military.
Four years after the sequester began, it’s now becoming increasingly clear the sequester has compromised the preparedness of our troops and their equipment. Here are some quotes from U.S. commanders earlier this year:
Two months ago, Bloomberg also published an investigative piece on the topic. It learned our dedicated service men and women are literally dying because of the corners being cut to keep aged equipment in service. Since January 2015, for instance, 24 people have died in six noncombat Marine accidents – a five-year high for such fatalities.
And another important problem is boiling below the surface: The battlefield is quickly leveling as our adversaries around the globe obtain precision-strike capabilities that were once exclusively America’s. Parity on the battlefield means future confrontations are likely to last longer… and cost even more.
Escalating military spending and federal budget deficits in the years ahead look like low-risk bets. As it plays out, I fully expect gold and other precious metals to rise, just like they did before the sequester went into effect.
Take this opportunity now to construct a portfolio you’ll be comfortable holding for the balance of gold’s next uptrend.