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Gold’s Sensitivity to the North Korean Threat

By:
James Hyerczyk
Updated: Oct 1, 2017, 07:16 UTC

Dukascopy TV:  Jim gold made gains after the DPRK’s Minister of Foreign Affairs Ri Yong Ho warned the U.S. that its jet could be shot down close to its

Gold North Korea

Dukascopy TV:  Jim gold made gains after the DPRK’s Minister of Foreign Affairs Ri Yong Ho warned the U.S. that its jet could be shot down close to its border. Is it a good time to sell gold?

James Hyerczyk, FX Empire:  I think what you have to do is identify yourself as an investor or a speculator. If you’re just a player waiting on the sideline, waiting for an event to take place, a highly remote event to take place then this is probably the time to start exploring the long side and avoiding the short side. Because we do have heightened problems in the Korean Peninsula that could escalate into war. And so you have to know what you want to do with your money and what kind of player you are in the market.

If you’re someone who follows the markets every day and wants to make gold part of your portfolio then you have to be aware of the fact that gold tends to follow interest rates and interest rates really tell the whole story.

The Treasurys, for example, guide the rest of the markets around the world. So when we are in a tightening situation like we are with the Fed then certainly gold is not an investment that you want to hold on to because higher yields tend to make the dollar go up and since gold is dollar-denominated prices tend to weaken because of lower foreign demand.

Also gold doesn’t pay interest, gold doesn’t pay a dividend so it’s not the time of investment that you want to have.

So again you have to go back to identify what kind of player you are in the market. Again if you are someone who sits on the sideline playing for a one-time event, then selling gold is not recommended at this time.

Remember if you are an investor in gold you’re probably taking it on the chin right now because we are in a rising interest rate environment. We have the Fed already tightening. We have the European Central Bank threatening to tighten next month and the Bank of England is also on record saying that they may tighten. So this is not the kind of environment that is satisfactory for bullish gold traders.

Dukascopy TV: What would happen to the price of gold if these words turned into full-blown action?

James Hyerczyk, FX Empire:  Well obviously we’ve seen what can happen on a small scale the past two months. It there is a war if war does break out between North Korea and the U.S. or Japan, or South Korea, I think you’re going to see investors sell out portions of their higher risk assets like stocks and buy safe-haven assets like gold, the Japanese Yen, and the U.S. Treasurys.

Now gold may not be the most favorite asset because it is a clunky metal that you have to store and it’s hard to move around so traders do favor foreign currencies like the Japanese Yen during these time periods of conflict. So gold will probably go up if there is a conflict and that will be because investors are pulling money out of the market like the stock market, for example, and they need a place to park it somewhere where it’s safe. So that’s why gold becomes popular.

The other thing that you’re going to want to look at is how long the conflict is expected to last. If it’s a one-time or short event then you’re probably going to just see short-covering in the market and so that will be people who are short and panicking on the news buying back their positions. You may not see actual buyers come in for the long-run because they may not believe that the situation is going to last months or years. And that they may not want to participate in it. So I don’t think you are going to see panic buying going on if there is a conflict. I think you’re going to have an orderly process. And you have to pick your spots. You can’t just chase a market higher because there is a news event and when the news event goes away you’ll be left holding the bag at some pretty high levels. And so again, you’ll have to have some kind of a plan ahead of the event and then try to execute it as best as possible.

Dukascopy TV:  Do you think this gold surge will continue?

James Hyerczyk, FX Empire:  We seen over the last three months that the gold market has reacted to the upside on news of ballistic missile testing throughout August and September and traders have also shortened the amount of time that they’ve reacted to this news.

The first few times it happened, there may have been a rally in gold, a rally in the safe-haven assets for about 2 or 3 days and recently it only lasted 1 day. So I think investors are kind of getting used to the news and it’s no longer a surprise. So there would have to actually be some kind of military action. Some real fighting going on to convince traders that gold was going to go up. And then again, traders would have to reassess the situation, decide if it is going to be a long-term event, a short-term event, are there negotiations going on, is one side beating the other, is there a surrender, things like that, peace talks.

So if there is no escalation, or it is something that looks like it isn’t going to last long, the rally may only be a flash in the pan, and things would get over fairly quickly.

Dukascopy TV:  Well thank you so much, Jim, for speaking with us through the internet. It’s been a pleasure. And thank you at home for watching and don’t forget to click like and subscribe to Dukascopy TV for more interviews like this. I’m Kiays Khalil. Good-bye for now.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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