Tensions with North Korea are rising. What does it imply for the gold market?
The crisis on the Korean peninsula is exacerbating. On Saturday, the U.N. Security Council unanimously imposed new sanctions on North Korea in response to its recent tests of intercontinental ballistic missiles. After the sanctions were levied, which could reduce the regime’s annual export revenue by a third, the communist country vowed to exact “thousandfold” revenge against the U.S., as they violated North Korea’s sovereignty and were part of a “heinous plot to isolate and stifle” the country. Then, Donald Trump stepped in the action, issuing an extraordinary ultimatum:
“North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen... he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before.”
Trump’s comments come after the U.S. intelligence assessed that North Korea had produced a miniaturized nuclear warhead, implying that its nuclear weapons program had already advanced significantly and might pose a greater threat that previously thought. The regime ignored Trump’s warnings and said on Wednesday that it was considering plans for a missile strike on the U.S. Pacific territory of Guam, crossing the red line just hours after the statement.
The increased tensions rattled the financial markets, sending the S&P 500 Index south, as one can see in the chart below.
Chart 1: S&P 500 Index over the last three days.
Meanwhile, gold prices turned higher on worries about North Korea, reversing the downward move after upbeat U.S. job openings data which lifted the greenback, as the chart below shows.
Chart 2: Gold prices over the three last days.
Generally speaking, the crisis on the Korean Peninsula should be already priced into gold. However, the recent exchange of threats, as well as new findings of the intelligence suggesting that the nuclear potential of the regime is more advanced that previously considered, should spur some safe-haven demand for gold. Although investors should remember that geopolitical events usually provide only a short-term support for the yellow metal, the risk of a conflict with a (potential) nuclear power may be a different kettle of fish. Stay tuned!
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.