3 Reasons Gold is Losing its Shine Despite Tensions from North Korea

Luis Aureliano |


The United States and North Korea have been engaged in a spate of war mongering in the last couple of weeks over allegations that Pyongyang might have succeeded in its efforts to own a nuclear arsenal. In fact, the allegation is that North Korea might have miniaturized a nuclear weapon with the aim of fitting it on an inter-continental missile. The geopolitical landscape became especially volatile when North Korea's Kim Jong-un threatened to fire off one of those missiles towards the U.S. Island territory of Guam.

U.S. President Donald Trump responded to Pyongyang's threat with a promise to respond with decisive military action. In his words, "If [King Jong Un] utters one threat in a form of an overt threat … Military solutions are now fully in place, locked and loaded, should North Korea act unwisely. Hopefully Kim Jong Un will find another path!" The threats for war caused quite a steer in the U.S. financial markets and some of the panic rippled through the global markets.

Interestingly, the panic in the global financial markets caused gold to record a sudden upsurge because gold tends to record an uptrend in times of market volatility and uncertainty. In fact, gold jumped to a two-month high in the heat of the tensions. However, gold has given back most of those gains in the last couple of days. This piece examines some reasons the North Korean threats are not a good enough reason to seek refuge in gold.



The North Korea Tension Is Easing

Gold for December delivery is down to around $1,279 an ounce and spot gold just had its worst trading session in one month. The first reason for the decline in gold prices is that North Korea has swallowed its price in retracting some of its nuclear war threats. North Korea state media has reported that the regime has decided not to fire a nuclear weapon on Guam. The main reason for the war mongering was the threat of that military action – now that Pyongyang has retracted the threat, the tensions have abated and there are fewer reasons to be worried about military action.

The Dollar Is Becoming Stronger

The second reason gold prices took a hit is that the U.S. dollar is booking gains in the forex markets. Economic data showed that U.S. retail sales climbed by 0.6% in July to beat the consensus' economists estimates of 0.4%. The decent economic data is causing the USD to climb up in forex markets. The U.S. Dollar Index (DXY), which tracks the USD against a basket of six rival currencies, was recently up 0.27% to 93.94.

Roderick Schmidt, an analyst at ECN Capital notes that "the positive economic data is boosting market sentiments that the Federal Reserve might go ahead to raise interest rates for the third time this year". An increase in interest rates often boosts the USD while eroding the value of the yellow metal in the market.

Nobody Wants a War

The third reason the value of gold is declining despite the recent spate of war mongering is that nobody really wants a war. For what it’s worth, North Korea only wants to lay its hand on nuclear armament so that it can maintain diplomatic relations with China and the rest of the world as an 'equal'. However, the regime in Pyongyang has survival high on its list of priorities and risking a war with the U.S. is simply suicidal. The U.S. too despite the strong words of President Trump doesn’t really want to go to war with North Korea. A preemptive strike on North Korea could cause Pyongyang to attack U.S allies in Japan and South Korea – an action that could lead to the loss of live for many people include American troops.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GLD SPDR Gold Trust 121.31 -1.55 -1.26 8,279,718

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