Yesterday, gold spiked as North Korea accused the U.S. of declaring war. Will the rally last?

The war of words between the U.S. and North Korea continues. The latest escalation began last week, when Donald Trump made his UN address in which he threatened to “totally destroy” North Korea and called Kim Jong-un a “rocket man”:

“The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea. Rocket Man is on a suicide mission for himself and for his regime.”

It seems that the North Korean leader did not like his new nickname, as on Friday, he called the U.S. president a “mentally deranged U.S. dotard”. And on Saturday, North Korea’s foreign minister, Ri Young Ho, made a speech at the UN General Assembly, in which he argued that “none other than Trump himself is on a suicide mission”. We did not have to wait long for a response, as on Sunday, Trump tweeted:

“Just heard Foreign Minister of North Korea speak at U.N. If he echoes thoughts of Little Rocket Man, they won’t be around much longer!”

What a beautiful exchange of verbal volleys! But this is not the end, as on Monday, North Korea’s foreign minister asserted that the U.S. declared war on North Korea. Hence:

“(…) we will have every right to make countermeasures, including the right to shoot down United States strategic bombers even when they are not inside the airspace border of our country.”

Obviously, the White House rejected that assertion, calling it “absurd”. The latest rhetoric came when North Korea introduced a propaganda video presenting its rockets destroying U.S. aircrafts. The clip was released just hours after two U.S. bombers flew off the coast of North Korea.

The escalation of the conflict about the Korean peninsula has led some investors to worry about the possibility of a military conflict between the U.S. and North Korea. The price of gold spiked from $1,292 to $1,310, or about 1.4 percent, as one can see in the chart below.

Chart 1: Gold prices over three last days.

Will the rally continue? Well, we are skeptical. If history is any guide, “geopolitical risks in general, and threats from North Korea in particular, are not able to trigger anything but a short-term and limited response in the gold market”, as we showed in the September edition of the Market Overview. The truth is that North Korea has claimed many times before that the U.S. or another country has declared war against it. According to nknews.org, the phrase “declaration of war” has appeared in English articles of the Korean Central News Agency over 200 times since 1997.

The take-home message is that the rhetoric between the U.S. and North Korea has recently escalated (again). Thus, gold prices spiked. However, investors should not panic, as the hermit country has a long tradition of claiming that the U.S. has declared war on North Korea. This is why we believe that the impact on the gold market will be only temporary, but – given the profiles of Kim Jong-un and Donald Trump – everything is possible (military action would add some fuel to the fire). Stay tuned!

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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