The Pietra Sussan Company

05/07/17

Markets around the world reacted on the 4th of July as North Korea test-launched an Intercontinental Ballistic Missile into the Sea of Japan, the first test of such a missile in the country’s history.

With the possibility that the new design could reach the United States or Europe and potentially carry nuclear warheads, this launch represents an unpleasant development for global security.

The reaction of the gold markets was textbook. In London’s wholesale market gold prices climbed by a maximum of £5 to £949 per ounce, recovering from a significant low point the day before as investors moved their wealth to safer havens.

The US gold markets were shut for the 4th of July holiday, but 10-year US Treasury yields closed at 2.35%, the highest level since early may. This marks a sharp rise in borrowing costs, the highest since the US Presidential Election in November. US gold futures for August delivery climbed 0.4% to $1,224 per ounce.

Elsewhere, the Indian gold markets saw a similar rise after the seven-week low of the day before, with investors moving away from riskier assets like shares. While North Korean missile launches are becoming commonplace, the escalation of events and development of a new and longer-ranged missile caused renewed investor jitters.

Indian gold prices were also damped by the new 3% sales tax on gold bullion and the 18% charge introduced on jewellery fabrication costs, an ongoing effort in the Modi government’s attempts to fight black money.

A Rallying Market

This incident has provided a considerable boost to demand for gold, already high due to low prices after the mention of an interest rate hike..

Prices continued to climb throughout Wednesday as North Korea announced that its ICBM could carry a nuclear warhead (something that many analysts question, as the country has shown no signs of having developed sufficient guidance systems or re-entry shielding for such a weapon).

Prior to the North Korean launch, the price of gold had been falling rapidly after the weekend as crude oil continued to recover thanks to OPEC agreements on output caps, while global stock markets rallied.

Silver and other precious metals also reached lows as data from the Eurozone suggested activity at a six-month high, with Asian stocks close to two-year highs. European gold investment prices fell to beneath €1080 per ounce, another sign of an increasingly bullish global gold market.

These lowered gold prices are a good deal for investors – they let you get more financial protection for much less money and make greater quantities of gold accessible for the same price.

Why Gold During Wartime?

Why might gold help if the cold war on the Korean peninsula goes hot? Even with North Korea’s now potentially international reach, it’s likely that any war there would be strictly local, directly affecting only the Japanese and Korean markets (although it could cause an increase in already massive US defence spending).

However, the effect of the war on the Asian markets will have knock-on effects around the world. For a start, the South Korean capital Seoul sits within range of North Korean artillery, and will likely suffer heavy damage in the opening hours of any conflict.

The knock-on effects of damage may well cause huge economic problems throughout South Korea, while nervous investors pulling their exposure to South Korean companies based near the frontlines will likely cause even further damage whether or not a war breaks out. Many of these investors will be looking to secure their wealth with a less vulnerable asset, causing gold prices to climb as tension in the area escalates.

A Korean war also has the potential to escalate rapidly, especially with unstable leadership in the US and the country’s status as a buffer state for China. Should US and Chinese forces get into a shooting war in the region, or more likely impose sanctions and economic embargoes on each other, global trade may be severely impacted. This also applies in terms of US-Russian relations and Japanese/South East Asian countries.

Again, nervous investors may already be pulling out of investments exposed to risk from a potential economic battle between the two major superpowers involved. Many will be fleeing to gold, which will result in further price rises. The same happened in the run-ups to the Iraq and Afghanistan conflicts, neither of which were as potentially dangerous to the world as a whole as a new Korean conflict.

Even if you are not exposed to the potential consequences of the Korean War abruptly resuming, now is an ideal time to invest in gold ahead of any further developments.