Will Kim's Denuclearization Dethronize Gold? / Commodities / Gold and Silver 2018
Breaking News! North Korea has agreed todenuclearization. Great! But what does it mean for the gold market? And… why isthis not true?
Gold StartsWeek Badly
The yellow metal struggled on Monday. Its pricedeclined from $1,335 to $1,320, or more than 1.1. percent, as one can see inthe chart below.
Chart 1: Gold prices from April 20 to April 23, 2018.
The weakness could be caused by many factors. Manyanalysts point out Friday’s statement from North Korea that it was prepared tosuspend its nuclear program. It sounds reasonable, as denuclearization wouldreduce the geopoliticalrisk, diminishing the demand for safe havens, such asgold. But does it really make sense? Let’s dig into this narrative.
DenuclearizationDoes Not Mean Denuclearization
On Sunday, President Trump tweeted: “Sleepy Eyes Chuck Todd of FakeNews NBC just stated that we have given up so much in our negotiations withNorth Korea, and they have given up nothing. Wow, we haven’t given up anything& they have agreed to denuclearization (so great for World), site closure,no more testing!” The tweet followed Friday’s message: “North Korea has agreed to suspendall Nuclear Tests and close up a major test site. This is very good news forNorth Korea and the World - big progress! Look forward to our Summit.”
Trump’s comments came as a response to the recent resolution from North Korea titled “Onproclaiming great victory of the line of simultaneous development of economicconstruction and building of nuclear force.” Surprisingly, many journalistspublished headlines that North Korea had decided to suspend nuclear andintercontinental ballistic missile tests.
Surely, the country declared: “we will discontinuenuclear test and inter-continental ballistic rocket test-fire from April 21.”It might be an important step toward denuclearization, but it is no more than the fulfillment of a precondition for talks. Thesuspension may imply that North Korean has already learned how to use itsnuclear arsenal, so it does not have to test it anymore. Especially that thetesting site may have suffered negative environmental effects.
And there is nomention of abandoning the nuclear arsenal. Kim Jong Un makes it clear thatnukes remain a “treasured sword”. Surely, North Korea may support thedenuclearization of the Korean Peninsula, but it does not mean that it willabandon its nuclear weapons. At least unless the U.S. removes its troops fromthe Korean Peninsula and the nuclear umbrella defending South Korea and Japan.Hence, although Kin Jong Un may support the concept of a nuclear-free world, itdoes not mean that it will give up its nuclear weapons without getting anythingfrom the American side.
Implicationsfor Gold
What does it all mean for the precious metals market?Well, nothing. As North Korea didnot really pledge to denuclearize, gold shouldn’t be significantly affected. Itwill not be degraded, just as the rising tensions didn’t boost the price ofgold. But even if Kim Jong Un promised it, itwouldn’t shake the price of the yellow metal.
Surely, there might be some temporary effect, asweaker tensions about the Korean Peninsula may reduce the demand for gold. Wecan see such an effect even now, with only rumors about the talks betweenPresident Trump and Kim Jong Un in May or June. A huge progress in diplomaticrelations between two countries since last summer. The risk of the immediatenuclear apocalypse is off the table, fair enough.
However, as we showed in the September edition of the Market Overview, gold’s reactions to geopolitical tensionsabout the country ruled by the Kim dynasty havebeen usually short-timed and limited.
Hence, it seems that therecent declines in the price of gold had more in common with the spiking U.S.dollar and bond yields approaching 3%. Macroeconomicstrumps geopolitics. We will analyze these developments for you in theupcoming editions of the Gold News Monitor. Stay tuned!
Thank you.
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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor
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