To Understand the Gold Price Trend, Look to North Korea as the Indicator
The gold price per ounce has resumed trading above $1,300. It spent a week below that level and had precious metal investors worried about a gold slump as the U.S. dollar kept gaining over rivals like the euro.
It’s all because of North Korea, as explained below. But first, let’s consider the wider context and the more traditional risks.
Gold Seems Ready to Make a Bold Move
Chances are, the gold price will quickly resume trading at the mid-$1,300 range and then make a bolder move. The dollar might be moving higher, but it’s unclear for how long.
Many expect the Federal Reserve to raise rates four times in 2018. Yet, Fed Chair Jerome Powell stated he would raise rates three times and in small increments.
Investors, particularly those who keep track of the gold price, should note that the Fed will lift rates only if the June unemployment rate report delivers especially optimistic numbers.
The Fed is well aware that a sudden increase in interest rates could compromise economic growth significantly. Both the national debt and personal debt levels in the United States make lifting rates a dangerous proposition.
Another Rate Hike, Another Recession?
The Republicans are getting ready for this fall’s mid-term elections. One too many rate hikes could trigger a recession.
Thus, Powell faces considerable political pressure to ease the rate hikes.
Moreover, oil prices continue to rise, and the dollar tends to fall when this happens. The pattern has not worked recently, as both the greenback and oil have moved in tandem.
Yet, while the factors contributing to higher oil prices are strengthening, the dollar has reached its peak.
The Fed will have to account for the fact that inflation—should it really have risen in a meaningful way, beyond statistical minutiae—owes far more to a higher oil price than to economic growth and higher wages.
Trump Throws More Risk Around
If that weren’t enough to warrant a sustained increase in the gold price, President Donald Trump has just injected more risk into the markets.
Trump has addressed Republicans’ complaints that the post-2008 financial crisis rules, known as the Dodd–Frank Wall Street Reform and Consumer Protection Act, hurt banks and economic growth.
The president has now secured a bipartisan repeal of many of the Act’s provisions, which effectively makes it easier for commercial banks to take risks. (Source: “Congress eases post-crisis bank rules in victory for Trump,” Reuters, May 22, 2018.)
Democrats, who have argued against the repeal, warned that Dodd-Frank offered investors and consumers critical defenses against speculation. They might want to consider gold now.
Everything Seems Slated for a Higher Gold Price
The internal macro- and micro-level scenario in the United States has certainly shifted in favor of a higher gold price.
Yet, the most significant bullish signals for gold, as usual, have more geopolitical origins.
There has been much talk of a possible war involving the United States and Iran. Whether or not there is a direct conflict between Washington and Tehran, a proxy war between the two is already in full swing.
Hezbollah, one of Tehran’s most steadfast allies, had already gained strength, playing a key role in defeating ISIS in northeastern Syria.
And now, Hezbollah has delivered a strong victory in recent parliamentary elections. Israel tends to get nervous when Hezbollah gathers strength. Thus, it could engage Hezbollah as it did in 2006.
With the Iran Deal now in shambles, there’s an ever-growing probability that the U.S. is about to increase its military presence in the Middle East.
There are even rumors about Washington potentially causing further tensions with plans to recognize the occupied Golan Heights as Israeli territory. (Source: “Israel Pushing Trump to Recognize Hold on Golan Heights, Intel Minister Says,” Haaretz.com, May 24, 2018.)
Certainly, the Iran, Lebanon, and Syria factors are heating up—the Golan Heights drive presents even greater regional challenges than the Jerusalem recognition. Yet, precious metal traders appear to have absorbed all the risk they can about the Middle East.
North Korea Has Proven to Be the Biggest Driver of the Gold Price in 2018
Indeed, the geopolitical risk factor that appears to have produced the most bullish results for the gold price in 2017 and 2018 has been North Korea.
Looking back at the events of the past few months, tensions with North Korea have eased to a level not seen since 1994.
Just as in 1994, when President Bill Clinton offered aid and a lifting of sanctions in return for North Korea’s agreement to dismantle its nuclear program, Trump has used a carrot-and-stick approach with Pyongyang.
Nothing came of Clinton’s initiative, but Trump and North Korean leader Kim Jong-un had agreed to meet. They had actually set up a date: June 12, 2018, in Singapore.
The promise of a thaw in the Korean peninsula, leading to a reunification of the two Koreas, dampened bullish expectations for the gold price.
Gold, ever the haven of choice for investors worried about the future, appears to have linked itself to the Korean scenario. And Trump gave them too little to worry about since April.
The geopolitical optimists, longing for a return of the Gorbachev-Reagan summit in Reykjavik in 1986, had their hopes up since late April for a Kim-Trump summit.
And that optimism coincided with the sharpest drop in the gold price since September 2017.
The Gold Chart
As the gold chart shows, the gold price posted its sharpest rise in September 2017. As it happens, both the rise and fall of the gold price in 2017 were related to North Korea.
Chart courtesy of StockCharts.com
In August and September 2017, the rhetoric between Trump and Kim had assumed highly bellicose tones: the gold price made a sharp move up.
As tensions eased, or were brushed under the proverbial carpet, the gold price dropped.
Trump had made it clear, to those willing to observe, that his openings to North Korea were not entirely sincere.
He appointed John Bolton as national security advisor. Bolton is one of the architects of the concept of “Axis of Evil” that President G.W. Bush introduced during his 2002 State of the Union address. Bolton was the signal that Trump would eventually hold back.
Gold investors should have interpreted Bolton’s appointment as a signal to buy—not to sell. Bolton is the kind of fellow who sees every problem as a nail—and every solution as a hammer.
The Trump-Kim Summit Is Off
Bolton was the hint. Trump has written an open letter, even cordial in parts, announcing there would be no June 12 summit.
The cancellation has reintroduced a renewed proliferation of crises on the horizon. More investors will consider shifting their assets toward the shelter investment of choice: gold.
North Korea has created an opportunity for gold investors. Trump should not have shown his muscles, threatening North Korea with a Libyan scenario.
He should have limited the discussion and promises to an exchange of diplomatic recognition and lifting of sanctions in exchange for nuclear concessions.
But he took a different course; one gold investors should have recognized.
The Trump administration appeared to have expected the major turning point from the thaw that seemed to have started after North and South Korean leaders met a few weeks ago.
Instead, the dollar has weakened while demand for precious metals has increased over the past few days. This is likely to continue in the short term, as the market considers the news and its evolution.
The Fed may have little to add about a rate hike. Whatever it had to say, the market had already absorbed it. This will shake the dollar a bit and further contribute to boosting the gold price.
The North Korean-U.S. conflict has come back to life. If Kim Jong-un has described Trump as “mentally unbalanced” and a “gangster,” Trump has called Kim a “madman.”
The more interesting and insulting the war of words becomes, the better the gold price will perform.