Gold is starting the week off on a strong note, as the heated rhetoric between U.S. President Donald Trump and North Korean leader Kim Jong-Un has reached a new level. North Korea’s foreign minister stated on Monday that the U.S. has declared war on North Korea, and that the north reserves the right to take countermeasures, including attacking U.S. bombers not in North Korean airspace.
Foreign Minister Ri Yong was reportedly quoted as saying “The whole world should clearly remember it was the U.S. who first declared war on our country.”
The further escalation in tensions between the U.S., its allies and North Korea has reached a level at which a misstep by either side could bring with it disastrous consequences. It seems that the threat of a nuclear conflict has not been this high since the darkest days of The Cold War, and as of right now there does not appear to be a solution forthcoming.
Although current sanctions against North Korea may be causing some economic distress, the country’s leadership appears intent on standing their ground. Although hope remains for a peaceful solution, the idea of some type of armed conflict seems to be more and more likely.
Markets do appear to be taking the threat from North Korea more seriously, as stocks are lower while treasury yields are sinking. Although appetite for risk may be waning, investors are not yet in panic mode. That could change quickly, however, with provocative actions by either side.
In addition to geopolitics, investors will also be watching the data stream closely following last week’s FOMC meeting. As expected, the Fed elected to hold rates steady for now and reiterated the likelihood of another hike later this year. The central bank also reaffirmed its forecast for three further hikes next year. There are skeptics, however, as inflation remains stubbornly low and no major tax or fiscal spending legislation has been passed as of yet.
Gold investors are either not overly concerned about slightly higher rates, or perhaps doubt rates are going anywhere of significance any time soon. The possibility of a topping process in stocks is also likely playing a role in gold’s recent upside, and a major crash or reversal in stocks could send a significant amount of investment capital into the yellow metal and other hard assets.
A long-term bull market in gold could be getting underway just as stocks really run out of gas. Stocks have arguably become extremely overvalued, with some analysts suggesting that the bottom could be ready to fall out almost any day now. The gold market has cleared some key technical hurdles and buyers have jumped in on recent dips in price. If stocks begin to falter, or if the geopolitical landscape deteriorates further, the market could potentially make a quick run at the $1400 level. As we have discussed previously, however, slow and steady wins the race in the long run, and recent price action in gold could be considered very constructive for further gains in the coming weeks and months.