Gold is often bought during times of uncertainty, and right now it would seem that investors are feeling more and more uncertain about numerous issues.
Tension levels between the U.S. and North Korea have reached new heights. In an almost tit for tat exchange, leaders from both nations have traded threats. The risks of a nuclear confrontation appear to be at the highest levels since the Cold War, and both militaries are on alert.
It remains unclear if North Korea actually has the capability to deliver a nuclear warhead to North America, but recent assessments by U.S. intelligence agencies would seemingly indicate that North Korea has-or is very close to having-such capability.
Guam has been at the center of attention in recent days as North Korea has threatened to strike the island. Guam is of strategic importance to the U.S. as it is home to thousands of American soldiers as well as an Air Force bomber group.
President Donald Trump has vowed to hit North Korea if it attacks Guam or other U.S. interests, and although a first strike by the United States seems very unlikely, it cannot be ruled out. The situation has, however, gotten a bit stickier as China voiced its position. The country has said that it will remain neutral if the U.S. is attacked by North Korea, but will protect North Korea if the U.S. attacks or attempts to remove the current regime.
The threat of war with North Korea is more than enough to keep investors on their toes. Add to this threat the ongoing investigation of possible collusion with Russia by the Trump campaign and the possibility of U.S. military action in Venezuela and you have a recipe for significant risk aversion.
The flight to safety has not been seen in force yet, but unless things cool down dramatically it could simply be a matter of time before investors shun risk assets en masse. Stock investors have remained surprisingly resilient in recent weeks, but that resilience is likely approaching its limits.
Gold has been trending higher for several weeks now, and is close to breaking out above its most recent highs. An upside breakout in the yellow metal could draw further buying interest, and the market could really be off to the races if the current geopolitical landscape does not change quickly.
The U.S. is still also facing numerous domestic issues that could potentially keep gold and other perceived safe haven assets moving higher. Violence in Virginia over the weekend at a protest is another sign of the divisions being faced within the country. The lack of major tax or fiscal spending legislation may also eat away at investors’ appetite for risk.
The ongoing lack of inflationary pressures may also keep the Federal Reserve from becoming more aggressive in monetary policy, and the bull market in stocks may be reaching its crescendo after almost a decade of gains.
Any way you slice it, it appears that the gold market is beginning what could prove to be a multi-year protracted bull market as stocks may be in the process of making a long-term top. Heightened geopolitical tensions may accelerate a significant move higher in gold, with the possibility of a substantial spike higher in price should military conflict become unavoidable.
Hopefully, diplomacy will be the primary tool used to reach a peaceful resolution.