On Sunday, North Korea conducted another nuclear test. What does it imply for the gold market?
The crisis over the Korean Peninsula tightened again after a short period of calm. On August 15, Kim Jong-un said he was delaying a decision on firing missiles towards Guam to see what Trump does next, which helped to ease the tensions between North Korea and the U.S. However, the regime launched ballistic missile over Japan on August 29 (after firing a few Scud missiles on August 26). And three days ago, North Korea detonated a nuclear test, causing a magnitude 6.3 earthquake.
Although the country has conducted already five nuclear tests, the recent one was the strongest explosion, about five to six times more powerful than the previous blast. Moreover, it was likely the hydrogen bomb (although probably not fully fledged), which is far more powerful than the regular atomic weapons. The improved nuclear capability of the Kim’s regime worried investors, fueling. Hence, the price of the yellow metal reached 11-month high on Tuesday, as one can see in the chart below.
Chart 1: Gold prices over the last year.
However, investors should remember that geopolitical events, including incidents related to North Korea, often cause only short-timed and limited moves in the gold market (we write about this issue in a detailed way in the). For example, both North Korean nuclear tests conducted in 2016 failed to trigger a sustained gold’s rally (actually, the price of gold declined after the second test in the previous year). It suggests that gold’s recent flight may have more to do with the growing perception that Fed is becoming more dovish and struggling U.S. dollar rather than with rising geopolitical tensions. Indeed, the of the Fed hike in December decreased from almost 47 percent one month ago to the current about 30 percent.
To sum up, North Korea conducted its sixth and most powerful nuclear test up to date. According to the standard story, the recent gold’s rally was caused by the safe-haven demand triggered by the regime’s actions. However, it might be the case that the renewed concerns about the Korean Peninsula only added some upward pressure to the underlying fundamental bullish trend caused by the depreciation of the greenback and rising expectations of a less hawkish Fed. It means that the gold prices should not decline if the tensions between the U.S. and North Korea ease, but the buying interest in the safe-haven metal may weaken then. Stay tuned!
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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.
Sunshine Profits‘ and Editor