The threat of nuclear war between the United States and North Korea has brought some volatility to global markets.
In the wake of Trump's “fire and fury” comment, the American think-tank Capital Economics published a report detailing the potential negative impact on economic growth if America goes to war. Gareth Leather and Krystal Tan, the authors of the study, point out that "A prolonged war in Korea would significantly push up US federal debt, which at 75% of GDP is already uncomfortably high."
But what impact will these geo-political events have on the value of precious metals?
As it turns out, while the markets show volatility across the board - with a lot of investors getting sheepish about the future of economic opportunities in the region (especially in China) - the value of precious metals like gold and silver is only going up.
Geo-political Instability is Good News for Precious Metals
When it comes to the value of precious metals like gold and silver, geo-political instability is good news. A recent example can be taken from the Obama administration. In 2009 Obama sent a letter and an envoy to Pyonyang, asking the North Koreans to begin discussion around denuclearization. Nothing changed until 2012, when North Korea’s new leader Kim Jong-Un took power and continued to defy American interests. Not surprisingly, it was during these tense years of nuclear diplomacy that the price of gold peaked at over $1,854 USD/kg in September of 2011.
So why does gold and silver not lose value in relation to general market trends? It’s complicated, but mainly to do with their finite nature. As there is only a limited supply of gold and silver on the market, it generally sits outside of market forces tied to currency evaluation and inflationary forces. While gold and silver prices are impacted by market forces, it is at a much slower rate than most other forms of investment. It is only when geo-political crises destabilize markets that gold and silver rise sharply in value.
Gold on the Rise AgainThis is precisely what is happening to the price of gold in response to tensions between North Korea and the United States. The price of gold has risen steadily since August, illustrating the relationship between North Korea and precious metals quite perfectly: increased anxiety and fear around physical conflict will induce the value of precious metals to rise. A simple comparison can be made between the price of gold on August 8th (before any tensions arose) and the price of gold between the two missile tests conducted by the North Korean regime (Sept 6th). On August 8th the price of gold/ounce was $1,261.10, while nearly one month later on Sept 6th it had risen to $1,334.4. This is a difference of $73.30 over one month’s span. As tensions have eased in the past few weeks the price of gold has fallen back to average rates – but rest assured that if threats and demonstrations continue into the new year the price of gold could break $1,400/ounce!
War Will Have the Opposite Impact
Simone Gambarini, an analyst at Capital Economics, has made it clear from her research that the positive correlation between North Korean tensions and the value of precious metals only lasts until war breaks out. According to Gamberini the price of gold rises “in anticipation of a conflict but often falls when tensions turn into full blown war.”
Why is that? Gamberini tells us directly: “in the event of a crisis involving the US directly, investors are more likely to seek refuge in an asset like gold which bears no country risk and also benefits when the dollar depreciates.”
Now Is as Good a Time to Invest as Ever
So it’s really a matter of understanding the geo-political climate and investing accordingly. If you read the intentions of Kim Jong-un and Donald Trump correctly, you can make a healthy profit on your gold and silver bullion investment over six months or less. So start buying cheaper gold now before things start really heating up on the Korean peninsula!