Investors are aggressively increasing their holdings in gold and European defense stocks, driven by concerns that President Trump's attempts to gain control of Greenland could trigger geopolitical fractures, dismantle NATO, disrupt the global order, and undermine the credibility of the US dollar.

While the market generally expects the upward trend of these two asset classes to persist regardless of how the Greenland situation evolves, investors still face a dilemma: how to structure their portfolios to hedge against potential long-term negative impacts.

Trump intends to control this Danish territory through acquisition or even military means. However, Greenland has explicitly refused to become part of the United States, a stance that has garnered support from Europe and Canada.

Previously, most investors largely dismissed Trump's attempt. Yet, the possibility of his ambitions materializing has sharply increased following the US's sudden military raid to forcibly seize control of Venezuelan strongman Maduro.

For investors who were anticipating a moderation in market risks after last year's tariff disputes, this news makes for a particularly challenging start to 2026.

Simultaneously, Trump is also considering intervening in Iran's domestic unrest. Furthermore, the US government's threat to prosecute Federal Reserve Chair Powell has reignited market concerns about the Fed's independence.

Following Maduro's capture, international gold prices surged over 4% last week and hit a new record high on Monday. The European Defense Stock Index (SXPARO) also reached a historic peak on Monday, after recording its largest weekly gain in over five years last week, with a staggering increase of 10%.

"The current movement in gold prices clearly shows that the market is deeply concerned about geopolitical risks," said Matthew Miskin, Co-Chief Investment Strategist at Manulife Investment Management, commenting on this round of gold's rise.

Traditionally, gold, which generates no interest income, has been viewed as a safe-haven asset for investors during times of broad market uncertainty or high volatility.

Many investors have long advocated for a significant increase in gold allocations, including hedge fund manager Ray Dalio. Last year, he pointed out that the performance of US stocks was noticeably lagging behind other assets.

Is the Global Order in Jeopardy? The US's coveting of Greenland could have far-reaching ripple effects beyond initial expectations, impacting not only NATO but also the Ukraine ceasefire process and the situation in East Asia.

Analysts point out that if the US were to forcibly seize Greenland from its NATO ally Denmark, such an act could not only signal the end of the NATO military alliance but also fundamentally disrupt the existing global balance of power.

"This would fundamentally shake the framework of global order that has gradually taken shape since the end of World War II, the establishment of the Bretton Woods system, and the founding of NATO," said Steve Kolano, Chief Investment Officer at Integrated Partners.

If Europe is forced to reduce its defense reliance on the US, then investors' aggressive buying of European defense stocks is hardly surprising. Since the outbreak of the Russia-Ukraine conflict in 2022, the market capitalization of the European defense sector has more than doubled.

Shares of German tank manufacturer Rheinmetall AG (RHMG.DE) surged 19% last week, while Sweden's Saab AB (SAABb.ST) saw an even sharper rise of 22%.

"The ongoing rhetoric surrounding Greenland is providing continuous momentum for the rally in defense stocks," said Jeremie Peloso, European Chief Strategist at Berenberg Bank Research.

The Difficulty of Pricing Political Risk Beyond buying gold and defense stocks, investors find it challenging to identify other suitable assets to hedge against these risks.

"One major difficulty with political and geopolitical risks is pricing them quantitatively. Given that such events are often high-impact but low-probability black swans, markets typically cannot react to them accurately," said Idanna Appio, a portfolio manager at First Eagle Investments, who personally holds some gold to hedge geopolitical risk.

"If you adjust your portfolio for an event with only a 1% to 5% probability of occurring, it essentially means you are accepting being wrong 95% of the time."

This also explains why broader market volatility has not yet emerged—global stock markets remain near all-time highs, and Danish government bonds are rising in tandem with other European bonds.

The tightly controlled Danish krone has weakened somewhat, but interest rate differentials are the key driver, and its exchange rate remains closely aligned with its central rate peg to the euro.

Where is the Safe Haven? Jack Ablin, Chief Investment Officer at Cresset Capital, noted that if the US takes military action regarding Greenland, its impact would be fundamentally different from the Venezuela incident. "This would be a major event significant enough to trigger a safe-haven sell-off in both stocks and the US dollar."

When Russia acted on its threats against Ukraine, traders reacted swiftly, causing sharp fluctuations in oil prices, the euro, and stock markets.

"If the US seizes Greenland by force or coercion, funds would flow into US Treasuries seeking safety, while European government bonds would be sold off. At that point, such assets would no longer be considered safe havens by value investors," said Christopher Hodge, Chief US Economist at Natixis.

Investors generally believe that, in the short term, the US dollar and US Treasury bonds might benefit from an influx of safe-haven capital.

However, should transatlantic relations fracture, the appeal of US assets could wane, and concerns about the dollar's status would likely resurface. In fact, such worries briefly surfaced last April when the US announced its tariff policies.

Currently, there are no clear signs of a shift in capital flows stemming from US actions in Venezuela and threats towards Greenland. However, some market participants suggest these moves could eventually prompt capital to exit US markets.

"I consistently worry that once the international community perceives US actions as undermining international rules, it could trigger a reshuffle in global asset allocation, driving capital back to European and Asian markets," Appio stated.