I can’t help but think that President Trump has got himself into a bit of a jam about Iran. Did his advisers as well as the Israelis and Saudi’s really think this all through? They collectively believed that the Nukes deal was bad. So they ripped it up. They then started turning the screws on Iran in order to follow through with a poorly conceived piece of diplomacy. Tell your opponent to get rid of everything that lets them cling to power and agree to abject surrender. Unsurprisingly the Iranians didn’t give in. So, the military screws were tightened and more military assets were sent into a small area to prove the said point. At which point hardliners in the Iranian camp clearly decided to dare Trump to take ever more extreme actions. It’s almost like Bolton and Pompei had a secret deal with the hardliners to ramp up the tension! “You push us too hard and we shoot down your drone”. Cue Presidential threat of annihilation.

As I have said before, there is no obvious off-ramp, no clear exit strategy here. Except for one which is that the US quietly backs down given the choice of starting a full war with a clerical regime of headbangers who don’t sound very amenable to negotiations. That would, of course, piss off the Saudi’s who might indulge of some of their own hardline ante-upping.

Anyway, my point here is that it’s not clear to this observer that anyone has formulated a sensible plan of diplomacy combined with containment. Which means that everyone will be engaged in one-upmanship – except perhaps President Trump who by now probably realizes the scale of the challenge and of the risks.

The bottom line is that geopolitics as come back with a vengeance and I can imagine that President Putin is now rolling his eyes and sensing an opportunity. This is also a great backdrop for gold. The classic safe haven asset. And not unsurprisingly gold has indeed breached $1,400/oz. Here are some reports from the front line of fund flows.

First off back at the beginning of June (June 5th to be precise) Wisdom Tree reported they had seen “ the largest weekly inflows into its gold exchange-traded products (ETPs) as demand for the metal is growing. Inflows into long gold ETPs in the week to Tuesday 4th June were USD 621mn.” The chart below tells the story.

Next up we have strategists at the US bit of Deutsche Bank reporting that “Gold was the best performer across asset classes [last] week driven by the trifecta of lower rates, a lower dollar and rising geopolitical risks. Gold positioning has climbed to a 1 year high but remains well short of the highs in this cycle. Dollar long positions which had been declining from very elevated levels since May, fell sharply this week as shorts in the euro, yen and Swiss franc all fell.” Finally, we have commodity analysts at French Bank SocGen reporting that

“ In total, commodities attracted over $8.4bn with most of it being short covering $4.6bn and not surprisingly the precious complex attracted significant new long positions accounting for $3.6bn. The geopolitical tensions and an expectation of a more dovish Fed pushed investors to increase their gold exposure with prices rising above $1,400/oz late last week. Gold continues to be extremely overbought with short positions staying at their yearly lows and long positions climbing to their highest level since February 2018. This extreme positioning is likely to linger as Jerome Powell reassured markets about the Fed’s capacity and willingness to support economic expansion with rate cuts and other unconventional management tools. Managed money positions in Brent oil barely changed from the previous week despite Iran announcing last Monday it will breach its enriched uranium stockpile limit by June 27 and the US announcing more troops will be sent to the Middle East (on Tuesday).”

My own guess is that we’ll see a slow drip feed of bad news on the geopolitical front with more ratcheting up of tensions plus the inevitable China/US face off. In these circumstances, I can see gold continuing to gain traction and pushing towards $1450 an ounce. I can also see in this situation that some younger investors might choose to also buy into Bitcoin, pushing that above $12,000.