The Strategist

North Korea's nuke tests boosted interest in gold

09/05/2017 - 14:25

On Monday, gold quotes renewed the annual maximum, coming close to $ 1340 per troy ounce. The Sunday tests of a hydrogen bomb in North Korea sharply increased investor interest in protective assets, among which the precious metal is the most popular. With the further increase in tension, gold has every chance of rising higher in price, yet excessive supply of funds will restrain this rally.

Yesterday Reuters reported that gold quotes have reached their peak since September 27, 2016 in the world market - $ 1339.47 per troy ounce. Even with a slight correction at the end of the day, when the price of precious metal fell back to $ 1322.14 per ounce, growth for the day was 0.7%. Since the beginning of August, when US President Donald Trump promised North Korea "fire and fury," they have climbed up by 5.8%.

The renewal of multi-month highs in the gold market coincided with another worsening of the situation around the DPRK. On Sunday, Pyongyang announced testing of a thermonuclear charge. Seismic stations of various countries recorded ground tremors, on which basis the charge power is estimated at 100 kilotons. Yesterday, the Ministry of Defense of South Korea said that they see readiness to launch ballistic missiles of the DPRK. "The risk from North Korea may be different from the past, because now the regime has approached the "red line". The US and China’s reaction will be defining, "said NH Investment & Securities analyst Lawrence Kim in an interview with Bloomberg. On Monday, stock indices of the neighboring countries reacted negatively to the DPRK’s nuclear tests. The Japanese Nikkei 225 fell by 0.93%, the Korean Hang Seng - by 0.76%. "The markets’ reaction is similar to that when the missile launches took place. Investors sell stocks, rush to safe harbors, assess the situation, and then buy at the lows, as tension weakens", Hussein Sayed, chief analyst of FXTM, said in an interview with Reuters.

The market’s participants believe that currently there is a favorable situation for the growth of gold prices. "We have geopolitics and there is a fairly favorable environment with interest rates," notes Tom Kendall, chief strategist for precious metals at ICBC Standard Bank. With further escalation of the conflict, gold prices may exceed $ 1340 per ounce. However, it is not yet clear how high will the prices climb. "The trend of recent months has been that after a sharp reaction to geopolitical events, a gradual recovery of risky sentiments occurs, as the global money supply has a calming effect on the markets," sum up Societe Generale’s strategists.