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LAWRIE WILLIAMS: North Korean tensions persist. Gold price remains strong.

Perhaps North Korea’s President Kim Jong-un has blinked in the light of the U.S. military’s bomb strikes in Syria and Afghanistan.  It had been widely expected that North Korea would conduct its sixth nuclear weapons test on Sunday – the 105th anniversary of the birth of the country’s founder and dynastic progenitor, Kim Il-Sung.  In the event the country marked the occasion with a seemingly slightly less contentious test launch of what was said to be a medium-range ballistic missile – which failed spectacularly some four or five seconds into its flight – not that the North Korean people will be told that. 

One might have thought that this perhaps fortuitous missile test failure might have led to a minor defusing of tensions, but it appears that the USA appears to see even this as sufficient provocation to launch another round of warnings and anti-North Korean rhetoric now that it appears to have got North Korea’s usual ally, China, on-side.  What would have happened in terms of a U.S. response had the expected nuclear test gone ahead will remain an unknown, but given the war of words that has gone on since the missile launch it might well have resulted in all-out war – perhaps even a nuclear one.  The thought is perhaps too horrendous to contemplate – particularly given the apparent unpredictability of the North Korean leadership.  While its missile development programme seems unlikely to have been successful in producing a missile system capable of reaching the U.S. mainland, there are plenty of U.S. bases and allies within range of retaliation by what is seen by much of the world as a rogue nation.

Not surprisingly, the prospects of what could have been a serious conflict between a small, but unpredictable, state with a limited nuclear capability, and the world’s superpower with a thermonuclear arsenal capable of wiping North Korea off the face of the earth, had a strong positive effect on the global gold price which has been getting close to the next psychological price barrier of $1,300 an ounce.  What perhaps has been surprising is that gold has remained strong even though the immediate prospects of a military confrontation may have diminished a little, as have the prospects of a significant confrontation between the USA and China over potential action on North Korea.  One wonders what actual deal the Americans will have done with China to reduce those particular tensions – perhaps the USA will now go easy on any potential trade and currency confrontation with China and hold back on any serious opposition to China’s expansionist moves in the South China Sea.  President Trump claims to be the master of the deal and perhaps that is where his new policy with China is taking him.

But, with America’s overtly aggressive position continuing the gold price has remained positive at just over $1,290 at the time of writing.  My colleague, Ross Norman has pointed out that a break-out over $1,291 could be critically important as it would push the gold price through a trendline going to back to the all time high on September 22nd 2011 when gold hit $1922 an ounce.  Conclusively breaching this trendline, Norman avers, is to say we are very much back in a bull run. With $1,291 breached there would only be the minor inconvenience of the psychologically important $1,300 level - more of a speed bump than a real resistance level - before gold is able to move higher largely unfettered.  (See: Gold Poised - $1291 Is A Game Changer).

With President Trump still apparently keen to present himself as a decisive leader of the world’s most advanced military power one can’t rule out a military strike anyway without a climb-down by North Korea’s President, which seems unlikely.  Trump has alluded to North Korea’s weapons programme as something that needs to be taken care of and the prospect of both its nuclear and missile programmes advancing to the point where there might conceivably be the possibility of the nation launching a nuclear strike on the U.S. mainland if it is allowed to continue unchecked will be a major point in his thinking.  Better a pre-emptive strike now than allowing the weapons programme to continue unchecked.  Better still a regime change!

This prospect, though could bring Trump into conflict with China, which would prefer a negotiated solution, and his east Asian allies – Japan and South Korea in particular - which would both fear retaliatory strikes as being well within range of existing North Korean missiles, and who would thus probably be very nervous of a military solution.

So where do we sit now?  One suspects China, if it stays on-side with the USA, may try ramping up sanctions against North Korea in hope of bringing the regime down by peaceful means.  China may not want a unified Korea, but will be conscious that being allied to the North, under the present regime, is damaging to its own global political relationships and future.

President Trump may be talking himself into a corner where the only way out is either capitulation by the North Korean regime, either peacefully, which seems highly improbable, or through force which may turn out to be the only remaining option without Trump himself losing face.  The U.S. military will be confident it can take out North Korea without nuclear weapons being used – it has a few more of its MOAB bombs for example – but if North Korea were to employ the nuclear option then there is little doubt the U.S. would reply in kind.

Any sign of a military solution would likely take the gold price through Norman’s game-changing $1,291 level and almost certainly up through $1,300 too, perhaps comfortably.  It could knock back equity valuations, particularly in Asia, but also in the U.S. too where equities are looking vulnerable anyway and re-generate safe-haven investment in precious metals.  If a military strike proves to be the option taken then we could see the gold price soar.  What price $1,400 gold – or higher - this year?

17 Apr 2017 | Categories: Gold, China

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