Better U.S.-North Korea Relations Ignore Iran and Trade Risks’ Role in Gold Price
How will the gold price react to the higher potential for peace in the Korean peninsula?
The effects of the Trump-Kim summit are vague. It’s unclear what commitments Kim Jong-un has made and what benefits, if any, the United States has secured.
Still, the very sight of a U.S. president shaking hands with his North Korean counterpart has altered perceptions of geopolitical risk.
That could produce a significant shift in the gold price.
For months, President Donald Trump and Supreme Leader Kim Jong-un have communicated, using virulent rhetoric of the finest “I’ve got a bigger gun than you” tradition.
That explains why even the prospect of a peace agreement—no matter how flawed—will have reduced investors’ appetite for gold as an investment appeal.
Bearish Pressure on the Gold Price
Gold has contended with bearish pressure, which the impression of lower geopolitical risk, thanks to the easing of U.S.-North Korean tensions, has exacerbated.
The Federal Reserve’s 0.25% rate hike will strengthen the dollar.
Expected though it was, analysts and investors seem more interested in focusing on the high-dollar/low gold price link than considering the deeper implications of gold as a haven from excessive risk.
Thus, the growing potential for a trade war pitting the U.S. against its North American Free Trade Agreement (NAFTA) and European allies—not to mention China—has failed to shift interest from the markets to precious metals.
The Legend of “Solid Economic Performance”
One reason for gold’s lukewarm performance in recent weeks, after showing a promising start to 2018, is the media’s unexamined echoing of “solid” U.S. economic performance.
The pundits keep touting the May unemployment rate, which stood at 3.8%, the lowest in 18 years.
That same media is less prone to mention that wages have hardly increased in the past decade. They also seem to forget that a massive recession began in 2008, the effects of which still linger to the present day. Therefore, many families are still struggling to recover.
And the much-hyped inflation, against which the Fed plans to raise interest rates, has derived from higher energy costs—not higher wages. (Source: “U.S. Inflation Accelerates to Six-Year High, Eroding Wages,” Bloomberg, June 12, 2018.)
Indeed, the gold price will endure pressure until the Fed gets it over with.
The Fed has made its move but gold will also be under pressure as the European Central Bank (ECB) also plans to leave quantitative easing behind.
Long-Term Risks Will Boost the Gold Price
The Fed and ECB events could hurt the gold price in the short term. But they do nothing to cancel out the much more significant risks that could push the gold price in the longer term.
Before returning to North Korea, the recent G7 summit in Charlevoix, Canada heralded a total breakdown of how economic powers have played the global trade game over the past 25 years or so.
Trump voters will appreciate their president’s meticulous pursuit of his campaign promises. But there are no assurances that these will work.
Indeed, Trump has launched a political and trade war with…the United States’ main allies.
President Trump left the meeting as if offended. Or maybe he was just aloof, having realized that Europe has become a small player.
Trump sees China as the major power with which to spar over serious global trade issues.
Still, China won’t be an easy customer. Even if it looks favorably to friendlier U.S.-North Korean relations, China has threatened to cancel any trade agreements it has with the United States.
A Lot Could Go Wrong, Regardless of North Korea
This is more a reason to react cautiously to equity markets than to gold.
Indeed, it would be wrong to dismiss gold, even as everything could still go wrong in the Korean peninsula.
As a reminder of just how wrong things could go, consider a few recent “peace and diplomacy”-filled photo-ops that are eerily similar to those that delighted photographers in Singapore.
We have Iraqi President Saddam Hussein meeting former Secretary of Defense Donald Rumsfeld in Baghdad. Then there’s President Barack Obama shaking hands with Muammar Gaddafi at the G8 Summit in Italy in 2009. (Source: “Obama, Gaddafi shake hands at G8 dinner,” Reuters, July 10, 2009.)
And for good fun, remember that mere months—if not days—before Syria experienced the start of its bullet-riddled “spring,” President Bashar al-Assad was the subject of a favorable 60 Minutes interview.
His wife Asma was on the cover of Vanity Fair—in the same month that the so-called civil war began.
Therefore, as understandably optimistic as the impressions of the Kim-Trump summit may be, trouble lurks. In show business, it’s not over until the fat lady sings.
In the still U.S.-dominated global politics, it’s not over until (name a country) has agreed to use the U.S. dollar to pay for commodities, after having dismantled any and all significant military capabilities.
Better yet, relations become even more stable when the country in question expresses interest in joining the North Atlantic Treaty Organization (NATO).
So far, North Korea has not made any concessions on this front. And relations could still turn on a dime—particularly after the November 2018 mid-term elections.
Also consider Bitcoin. It has posed as a wannabe haven investment and has taken a significant blow lately. It was somewhere near $20,000 in December 2017 and closer to $6,000 in June 2018.
Therefore, it’s exceedingly rash to dismiss the gold price potential. Besides, investors and the media appear to have forgotten the many risk opportunities that Trump’s stance on Iran presents.
And Then There’s Iran, a Whole Other Level of Risk
The gold price could experience more substantial—in the sense of lasting—gains over the next few months. That’s because there exists another and oddly forgotten source of geopolitical risk. It’s Iran and it presents a far greater risk than North Korea.
Apart from all the other dealings with traditional U.S. allies that Trump is changing, there’s Iran.
If there was a point to achieving—however mild—a thaw in the U.S.-North Korean relationship, it’s to send a warning to Iran.
Kim Jong-un found “the road to Singapore” only after his military was able to demonstrate having the nuclear warhead capability and the—glitchy—means to deliver it.
Iran understands this, and after Trump pulled out of the Iran Deal (JCPOA), the Iranian leadership has understood more than ever, what the real purpose of nuclear weapons is. The purpose is deterrence.
For an idiosyncratic government or regime, such as Iran, pursuing nuclear weapons seems to be the only path to survival.
And that’s why Trump will start focusing on Iran again.
Iran to Gold’s Rescue
The Europeans have not followed up on their tough words after Trump canceled the United States’ commitment to the Iran Deal.
The Iranians have warned North Korea to pay close attention to the details of whatever it agrees to sign with Trump: Be very careful.
And the Iranians have a point. Trump has shown time and again, in his public as well as private life, that he’s prone to changing his mind and abandoning deals on a whim.
Nevertheless, with North Korea behind, Trump can pick up the Iran file again. In Tehran, the concern is that, with the North Korean dossier closed for the moment, the Trump administration can now focus the bulk of his foreign policy aggression on the Iranian enemy.
There’s a growing probability that the current diplomatic and economic confrontation will sooner or later give way to a military conflict.
Iran Can’t Back Down
Iranians are well aware they are a target on a number of levels. They could be subjected to a “spring” of their own. Or they will endure an attack against their nuclear research facility, the effects of which are unknown—but certainly not pleasant.
Before or after an attack, Trump’s strategy to squeeze Iran with sanctions risks the same failure all other sanction policies have met.
Iran cannot accept the U.S.—and Israeli—terms. Trump intends to re-offer the Iranians a “deal.”
But it will restrict not only nuclear research—civilian or military—but also the development of missiles and other conventional defensive and offensive weapons.
The plan is to leave Israel with such an advantage as to render Iran no more lethal than a sitting duck. Could any government—let alone one with revolutionary and anti-imperialist roots—possibly agree to such emasculating terms?
Europe may try to save face by encouraging Iran to adopt some of Trump’s alternatives to the JCPOA. But, given that it took 12 years to achieve the original agreement that Obama signed, the Iranians have already accepted its most diluted form.
In Iranian power circles, President Hassan Rouhani was and remains the biggest backer of the JCPOA. However, his—more democratic—influence has suffered now.
The hardliners can use an “I told you so” approach, which will intensify tensions with the United States.
Tensions in North Korea are one thing; those in the Middle East are quite another.
Iran’s control of strategic oil trade routes makes any wars/skirmishes in the Gulf always a risk for energy supplies. Military escalation becomes inevitable.
When the pundits and markets realize that the ultimate target of Trump’s meeting with Kim Jong-un was Iran, the gold price will respond in a manner commensurate with gold’s function as a haven.