Four months after US President Joseph Biden announced a decision to withdraw the US military from Afghanistan, the Taliban seized power in this country. The Taliban's active offensive against Afghan government troops began in May 2021. President Ashraf Ghani fled the country. On August 16, militants without a fight entered Kabul and occupied the presidential palace. It is still difficult to talk about the geopolitical consequences of the change of power in Afghanistan. However, rising tensions in the region are unlikely to contribute to a new gold rally.
How did markets respond to the Afghan crisis in late August?
The yield on US Treasury bonds fell by about 1.27% compared with the average over the past 10 years. The US stock market index remained at the same level. Gold rose to $1,790 per troy ounce. However, this was not caused by rising geopolitical risks, but by weak US employment data, which did not meet high expectations. Currently, yellow metal quotes are determined by macroeconomic data, the dynamics of the US currency and the fact that the Fed will begin to curtail the quantitative easing program. If geopolitical tensions around Afghanistan are short-term, the yellow metal is unlikely to rise significantly in price. However, some investors said that the situation in Afghanistan is one of the global problems, so it should be watched.
Nicky Shils, chief analyst of the precious metals market at MKS PAMP GROUP (USA), said that the Afghan crisis is likely to not affect gold quotes, given that macroeconomic data is now in the spotlight. However, serious consequences can subsequently manifest themselves due to the specifics of the region. Markets are watching the worsening situation in the region, considering it another global problem that can affect markets, as well as slow economic growth in Asia. Geopolitical conflicts have thus led to a rally in commodities, such as oil or gold.
Jeffrey Haley, senior analyst at Oanda Asia Pacific Ptey (Singapore), noted that there are too few large global companies in Afghanistan. Therefore, the Taliban's actions are unlikely to seriously affect world markets. However, it is worth watching the situation in any case.
At the moment, there are several key events for the yellow metal that investors should pay attention to.
US government spending will continue to rise
Joe Biden's policies will lead to higher budget spending, which could increase gold quotes. The volume of US public debt continues to grow, which will create problems in the long term for the country's economy. However, America remains a reliable borrower, preventing defaults on its debts. However, given the recent crises in Libya and Venezuela, there is no certainty that the authorities are not using gold reserves as loans to save their economies. If it turns out that the authorities will sell gold, then this news will negatively affect the quotes of yellow metal.
Since 2001, the United States has invested more than $144 billion in the reconstruction of Afghanistan. The decision to withdraw American troops from the country came as a surprise to the world public. Shortly after the end of this operation, the United States suffered the first combat losses in the region since the beginning of 2020 and the largest in a decade. Explosions in the area of the Kabul airport claimed the lives of 13 American military, which provided the evacuation of people. These events have shaken the status of the United States as a superpower. In the long term, this event threatens the country with a loss of global geopolitical influence. However, there are still no signs of a significant impact of the Afghan crisis on US economic power and the status of the dollar, which creates not the best forecasts for gold.
Risk of selling Afghan gold
The International Monetary Fund estimates Afghanistan's GDP at $19.9 billion. Despite the small size of the economy, the country occupies an important strategic position in Southeast Asia. According to a study by the US Geological Survey, 60 million metric tons of copper, 2.2 billion tons of iron ore, 1.4 million tons of rare earth elements (lanthanum, cerium, neodymium, cores of aluminum, gold, silver, zinc, mercury and lithium) may be in the bowels of the country. Afghanistan owns more than 700 thousand ounces of yellow metal. Selling a significant amount of gold for cash may negatively affect the precious metal market.
According to World Bank statistics for 2019, Afghanistan's budget was 75% funded by international sponsors, to a large extent, the United States. The American government pledged to allocate more than $300 million to restore the country after the withdrawal of troops. Currently, the United States has frozen a significant part of the reserves of the central bank of Afghanistan, the volume of which by mid-August 2021 amounted to $9 billion and was stored in New York. The payment of promised financial assistance has been suspended. However, Afghanistan will not be isolated under Taliban control. Many countries and blocs are interested in cooperation with Afghanistan: the USA, EU, Russia, Pakistan, Iran, China, Tajikistan, Uzbekistan and Turkmenistan. Due to the fact that each party has its own interests, increased instability may continue in the region. Due to the above circumstances, the Taliban may decide to sell part of the gold reserves located in Afghanistan to maintain economic stability in the country.