Gold moving within $10 of the high for the year set in June, buoyed by mounting risk aversion centered on the geopolitical situation. Silver traded above $17 for the first time since June as well.
North Korea’s quest for nuclear weapons has been an ongoing issue for decades, dating back to the Clinton-era “Agreed Framework” and beyond. Successive administrations (and the UN) repeatedly watched the DPRK successfully develop and test nuclear devices as well as missiles. Yet this week, we were seemingly surprised to find out that they may have successfully miniaturized a nuclear device that could be paired with their improving missile technology.
This diplomatic failure now threatens to further destabilize the region and the world. While markets clearly don’t like the mounting uncertainty — as reflected by recent safe-haven flows — the level of concern is quite limited at this point. However, as the situation continues to escalate, investors are likely to hunker down into more defensible positions that would assuredly include more gold.
There once was a time when heightened geopolitical tensions would have prompted safe-haven flows into the dollar. That doesn’t seem to be the case anymore, with the yen and the Swiss franc garnering most of the currency inflows. And the former is in the eye of the storm; just 649 miles across the Sea of Japan to the DPRK.
The dollar is facing some serious domestic headwinds, perhaps most notably the political risks. The geopolitical situation certainly does not improve the prospects for advancement of President Trumps economic agenda, even as a debt ceiling crisis looms.
Weaker than expected PPI data for July adds to the Fed’s worries that disinflationary pressures are mounting. As a result, December rate hike prospects were trimmed modestly. A miss on July CPI tomorrow would further erode the likelihood of another rate hike this year, while also raising doubts about when balance sheet normalization would begin.
Any signal that the Fed’s tightening cycle is coming to an end would add additional weight to the greenback, which might suggest potential back to pre-election levels in the dollar index. That could mean an additional 4-5% in losses are in the offing. That was surely push gold well above $1300, with even more bullish longer-term implications.