Sanctions, Geopolitics, and Gold

History gives us many examples of the same things happening repeatedly—i.e., “history rhymes”—which, upon examination, make clear the cause/effect relationships that show us how things work. Regarding sanctions, we can see that throughout history, as countries struggle with each other, financial and economic warfare have become an effective way of fighting each other without engaging in military warfare, which is too costly. So it is common for countries to find ways to cut off their opponents from their financial and economic needs. As a result, in the past and now, all countries in geopolitical conflicts have made lists of how they can hurt their opponents by cutting off what they need, while also taking stock of what their opponents can cut off that they might need. They make plans and take actions to prepare.

This includes money. For example, one might wonder if the United States, which froze payments on dollar-denominated debt to the Japanese before World War II and did the same with Russia’s assets after the Ukraine war began, might do that with other opposing countries' assets. If you’ve studied great conflicts in history, you know that such moves were typical rather than exceptional during big conflicts. This history and logic have also made clear that sanctions reduce the demand for fiat currencies and debts denominated in them. That’s because payments on them can be cut off, and worries about this dynamic typically drive what monies are sold and bought and lead to market movement such as we have seen recently. If you understand the history and are watching what is going on, you might understand why worries about the US “sanctioning” other countries’ US-dominated debt assets could lead countries and investors to shift some of their savings from fiat currency debt into gold, which is much more difficult to grab or devalue.

History and logic have also shown that the sanctions are especially appealing and easy to do when there is a debtor-creditor relationship between opposing countries. This is because the debtor that chooses not to pay the debt service owed to the opponent creditor country enjoys the double benefit of hurting the opponent financially while also reducing its own debt service burdens.

However, the debtor country also experiences the second-order consequences of weakening its credibility as a debtor, its currency value, and the demand for its debt. When this dynamic occurs with the world's leading power and its reserve currency, the global monetary order is weakened. As a result, holdings and prices of the leading power’s currency/debt decline relative to holdings and the price of gold.

That is just the way the mechanics work, which is worth keeping in mind now.