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The Key Factor Pushing Gold Up These Days - Outside View by PersonalFN

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The Key Factor Pushing Gold Up These Days
Aug 21, 2017

Gold Prices share an inverse correlation with the movements of interest rate in the U.S. Similarly, bleak economic prospects across the world cause a rally in gold investments. Though these factors are irrelevant today, gold prices are inching northwards.

You're probably aware that the U.S. Federal Reserve (Fed) has been unwinding its ultra-loose monetary policy stance for over the last 15-18 months now. Job markets in mature economies are showing tangible improvements. Moreover, the International Monetary Fund (IMF) has pegged the global growth estimates at 3.5% for 2017 and 3.6% for 2018, which are higher than the estimate of 3.2% for 2016.

In spite of all these positives, gold has firmed up considerably these past few months. Recently, it made a new 3-month high in the international markets (and in India as well).

So the question is what's driving international gold prices up?

he short answer is geopolitical tensions.

Even if you aren't an avid follower of global political news and current affairs, it's nearly impossible to have not read about the rising tensions between the U.S. and North Korea.

Realistically, it's been a war of words between them. However, if this sabre-rattling were to translate into any sort of military aggression, indeed, it could certainly cripple the global economy.

How dependable is the recent spike in gold prices?

If the gold prices offered any clue about the future, there isn't the possibility of a full-blown war. Notably, gold hasn't made a new 52-week high; an indicator considered a significant psychological benchmark.

In other words, the threats emerging from the rhetoric aren't perilous enough for the safe-haven asset to go through the roof.

However, the geopolitical experts believe the clarion call President, Donald Trump issued may backfire. Mr Trump talked about "fire and fury" alternatives to "teach a lesson" to his North Korean counterpart, although it might just be hot air. While he remains firm on enhancing defence budgets and expanding the country's nuclear arsenal, taking the military approach against North Korea would be a massive escalation. And, the world's biggest military power would want to avoid it at this juncture to maintain world peace.

But going by the series of events so far, it seems the war of words between these two influential leaders has given Kim Jong-un--the supreme leader of North Korea--a chance to continue with North Korea's ambitious nuclear power programme. It continues to be one of the most isolated global economies. Tougher sanctions would require a firm policy measure from China. At the moment, China's tallest leader, Mr Xi Jinping advised both countries to diplomatically resolve issues.

In fact, tensions between North Korea and the U.S. and its allies-South Korea and Japan-aren't new, but they seem to have reached the acme. None of Mr Trump's predecessors were as vocal and direct as him on the issue. Similarly, none of Kim Jong-un's predecessors were as radical, calculative, and decisive as he is.

Whether or not tensions will ease is unpredictable at this juncture, as equally difficult as it is about the possibility of any escalation.

At present, few possibilities that emerge are as follows:

  • The U.S. might take North Korea by surprise, and contrary to belief could wage a preventive attack
  • Depending on North Korea's response to this attack, the U.S. and its allies might launch a proportionate assault
  • With their economic supremacy and dominant position in the world trade, they might impose stricter economic sanctions on North Korea to inflict internal opposition to Kim Jong-un's plan.
  • There's already a proposal on the table (from China and Russia) that needs North Korea to stop its nuclear programme unconditionally and requires the U.S. and its allies to withdraw from the Korean peninsula, halting all military activities there.
  • Instead of communicating through the global media channels, the two leaders (Mr Trump and Mr Kim Jong-un) could discuss issues in person and reach a consensus.

While the last two possibilities are least likely to occur, they can't be ruled out. This is because the top three options accompany the risk of all-out war someday; and involves the threat of mass destruction. Clearly, this is a position no political leader can afford to choose at this juncture.

What are the implications for the gold prices?

Until both camps resort to a milder response, gold prices are likely to remain volatile with an upward bias. Nonetheless, avoid speculation of any of these outcomes and invest in the precious yellow metal.

Instead, hold 10%-15% of your portfolio in gold. And keep accumulating the safe-haven asset in smaller quantities, not when the prices are rising, but when these are depressed for some reason.

If you want to buy gold purely from the investment perspective, you might prefer to invest in the "paper form". Sovereign Gold Bonds and Gold Exchange Traded Funds (ETFs) are the most suitable alternatives.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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