Wednesday, October 11, 2017

How Could North Korea's Threats Affect Gold Prices?

After North Korea launched a missile over Japan on September 15th, the price of Gold jumped to its highest level in more than a year, reaching $1,357.35. This month, prices dropped slightly and are currently hovering around $1,285, but concerns over North Korea triggering a major international conflict are still on the minds of many traders, meaning the price of Gold could soar upwards again if tensions intensify. The precious metal is considered a safe haven asset, and its price rises in times of political turmoil, geopolitical instability, economic uncertainty and market volatility.

The war of words between the U.S. and North Korea taking place against the backdrop of Kim Jong-un’s nuclear program is an important factor to consider in Gold price evolution, as traders attempt to work out whether the conflict between President Trump and the leader he has called “Little Rocket Man” will turn into direct military confrontation. As highlighted on September 25th by Kang Kyung-Wha, the South Korean Foreign Minister, the Americans must "avoid escalation" in the face of North Korea's likely future "provocations". That same day, Pyongyang accused the President of United States of declaring war on North Korea, after Mr. Trump threatened to “totally destroy” the isolated country.

Tensions between Pyongyang and Washington are also causing economic fears. If the U.S. implements new sanctions against the communist dictatorship, the impact on the markets could be felt far and wide. In the event that the U.S. decides to “punish” the Chinese banks which largely finance the North Korean economy, the reaction of Beijing – which holds impressive U.S. currency reserves - could be catastrophic for the U.S. dollar.  The price of Gold is negatively correlated to the price of the dollar, which means that when the dollar rises, Gold tends to fall – and vice versa.

While many analysts say that neither country has an interest in war, both leaders are quite unpredictable and very provocative. With China and Russia opposed to any direct action by the U.S., the potential for escalation cannot be overstated. To protect their portfolios, many investors are now trading CFDs and precious metals to take advantage of Gold price movements (bullish and bearish). When tensions rise, the price of Gold tends to go up, falling back when the situation stabilises. UFX's commodity trading platform is one of the most widely used in the industry, offering its clients the best trading tools and most detailed charts.

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