12
June
Geopolitical Risk
Geopolitical risk simply means international political risk as posed by international economic, diplomatic and military tensions.
With the end of the Cold War, geopolitical risk was greatly diminished and many financial analysts believed it had been banished to the dustbin of history. But since 2001, geopolitical risk has been increasing and the threat of terrorism and war is an ever present process that can affect investors and savers wealth.
Geopolitical risk has been ignored in recent months as the financial and economic crisis has rightly taken centre stage. But it is important to remember that geopolitical risk remains an ever present threat as seen in the continuing tensions between India and Pakistan and Iran.
To attempt to analyse financial markets while completely and continually ignoring geopolitical risk is a serious error. Geopolitically, the world remains beset by many serious risks, any of which could seriously impact western economies. Iran, Pakistan, Afghanistan, North Korea, Lebanon and Israel are some of the hotspots posing risks in this regard.
This was graphically illustrated when Benazir Bhutto was tragically assassinated in Pakistan and gold surged some $25 on safe haven buying due to fears regarding a nuclear bomb falling into the hands of Islamic militants in Pakistan.
The crux of the matter is that the western world, and particularly the US, is massively dependent on oil and gas exports from countries who are at best lukewarm and at worst outright hostile to them. Russia, Venezuela and Iran are some of the more glaring examples of this.
Geopolitical risk contributed to the surge in gold prices to record highs in 1980 as the Shah of Iran was overthrown and the Russians invaded Afghanistan.
The black swan event that was September 11th is another example of geopolitical risk. Terrorism and war are ever-present threats to people’s wealth and unexpected events can have very adverse affects on financial markets.
