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So What Did Kim Jong-un Just Do to the Gold Price?

Tuesday, May 29, 2018

We’ve done a lot of gold price updates over the last year. And that ever-infamous despot Kim Jong-un has a nasty habit of appearing in pretty much every one of them. Why’s that, you might ask? Well, what happens on the other side of the world doesn’t tend to stay there – and it has a big effect on the gold price back here at home.

And as far as big events around the world go, North Korea tends to take the biscuit.

In pretty much every circumstance, if North Korea does something that threatens global stability, there’s a sharp jump in the gold price.

In the last month or two, we’ve experienced both historic peace talks and threatening language between the two countries on the Korean peninsula, and we’ve seen evidence that a meeting between Kim Jong-un and President Trump is either ‘uncertain’ or ‘imminent’ - depending on the day.

So logic would dictate that this May has been one of gold’s most volatile on record.

Well, it just so turns out that it really hasn’t. In fact, in pretty much all of these instances, the opposite of what we expected to happen eventually occurred. So what’s happened to the Kim Jong-un effect on gold?

Politics’ influence on the gold price

Rule one of the gold price is when bad things happen around the world, gold gets more expensive. That’s because gold is a trusted, safe-haven commodity. When things look uncertain, both financially and politically, demand for gold rises.

And what are the biggest examples of that? Look at a gold price chart – you’ll see sharp jumps after the 2008 financial crisis, during the crisis in the Eurozone of 2012 and after the result of the Brexit referendum in 2016.

But strangely, in a month where we’ve seen such profound political developments, the rules seem to have changed somewhat.

What happened to the gold price this month?

The historic peace talks we discussed earlier occurred on the 27th April, just over a month ago. Where such a sign of peace would usually depress the gold price, we instead saw barely any movement at all. In fact, it took four days for gold to substantially change – by which time it’s likely that other factors had far more direct an influence on its value.

That was probably the most conciliatory moment we’ve seen since between the two Korean nations, and tensions have since risen once again. To boot, the prospect of US peace talks with Korea seems increasingly uncertain. So, in quite the opposite way to before, you’d expect gold prices to steadily rise again over the course of the month. Has that happened? Well not really.

In fact, gold even experienced one of its most dramatic two-day falls of the year so far, losing 1.4 per cent of its morning spot value between the 14th and 16th of this month. If that wasn’t all confusing enough already, it happened right after one of the most profound geopolitical disasters of the month, the Israeli attack on Palestine.

So have the rules changed?

Before we all go crazy and start selling gold – let’s just take a moment to consider why this could be. After all, markets are complicated, and black and white narratives are never as easy as they seem.

The chances are the tried and tested methods of predicting the gold price remain largely dependable. We certainly can’t assume that gold has suddenly reversed a centuries-old correlation based on one month’s data.

In fact, there’s a combination of two main factors most likely to be causing this change.

  1. Firstly, there’s a good chance that other factors are having more profound an effect on the gold price than geopolitical ones. In particular, the developments in the US economy seem to be having growing influence, and could be simply doing a better job of pulling gold in the opposite direction than any geopolitical uncertainty.
  2. The second is more an argument of perspective. With chaos seeming to reign ever-supreme in the geopolitical world, there’s a good chance that investors just simply don’t know what to make of what’s going on anymore. When contradictory reports and suspicions come out of Washington and Pyongyang every other week, it’s no wonder the effect of these reports on the gold price is dampening.

Should you still buy gold?!

We think there are just as many reasons to buy gold as there ever were. But if you’re looking to which factors are a most reliable gauge of the future gold price – it seems that the American economy is increasingly taking centre stage over the geopolitical scene. In the months following one of the most profound tax reforms in US economic history, this hardly seems surprising.

Nonetheless, it’ll certainly be interesting to see how the markets develop over the coming months. Is the effect of geopolitical turmoil over, or will it simply take a little more than transpacific squabbling for it to materialise? Only time will tell.

In the meantime, make sure you stock up on your gold bars and gold coins.