The nuclear option: Investors eye gold nervously as North Korea taunts itchy-fingered Trump

Flag map of North Korea

EDINBURGH — Investors are eyeing gold as North Korea taunts unpredictable US President Donald Trump. This is because gold is often a beneficiary of rising geopolitical risk. Yet, the metal inched up only a little after Kim Jong Un delivered a ‘July 4’ gift to the US in the form of a ballistic missile test. For now, economic considerations in the US – like rising interest rates – are believed to be keeping a lid on the price of gold. Although simmering tensions are likely to support safe harbours like the yen and gold, market participants also appear to be indicating that they aren’t overly concerned that the spat between Kim and Trump will develop into a more serious clash in the short term. With the futile Iraq War, sparked when the west mistakenly believed Saddam Hussein had chemical weapons of distribution, still hanging over the world, there are undoubtedly question marks over North Korea’s true nuclear capabilities. Nevertheless, Trump has indicated that military options against Pyongyang are under consideration and Kim Jong Un is teasing the itchy-fingered president – all developments that poise gold for further gains. – Jackie Cameron

By Andy Sharp, David Tweed and Ting Shi

(Bloomberg) — When Kim Jong Un gave the order for what North Korea claims to be its first successful intercontinental ballistic missile test, he knew it would ruffle feathers in Washington and Beijing.

He may have even timed the launch of the missile, which Pyongyang dubbed the Hwasong-14, for maximum effect, ahead of the July 4 holiday in the U.S. and to throw a wrench into a planned meeting between President Donald Trump and Chinese counterpart Xi Jinping at the G-20 summit in Germany this week.

Whatever his motivations, Tuesday’s test — which follows a volley of other missile launches in recent months — shows Kim is not being slowed by international sanctions, Trump’s threats against him, or pressure from China. If anything he’s accelerating his efforts to acquire a bigger nuclear deterrent, with the ultimate prize a missile that can carry a nuclear-tipped warhead to the U.S. mainland.

People watch a television screen showing U.S. president Donald Trump during a news broadcast on North Korea’s ballistic missile launch at Seoul Station in Seoul, South Korea, on Wednesday, July 5, 2017. The U.S. confirmed a rocket launched by North Korea on July 4 was an intercontinental ballistic missile, with Secretary of State Rex Tillerson calling it a “new escalation of the threat” to the U.S. and its allies that would be brought before the United Nations Security Council. Photographer: SeongJoon Cho/Bloomberg

That shows how difficult it will be to rein him in as he exploits differences between the world’s two biggest economies on how to handle the regime. Trump says China hasn’t done enough to keep Kim on the leash, while Beijing’s ambassador to the United Nations warned this week the “consequences would be disastrous” if Washington and Pyongyang fail to resume talks.

“The launch’s significance lies in prolonging the game, but not changing the game,” said Yang Xiyu, a former Chinese negotiator in six-party talks on North Korea’s nuclear program. “We now know North Korea has entered a marathon-like confrontation with the international community,” said Yang, a senior researcher at the China Institute of International Studies. “Previously it was a middle-distance race.”

The United Nations Security Council plans to hold a closed session on North Korea on Wednesday afternoon, after U.S. Ambassador to the UN Nikki Haley requested an urgent meeting, a spokesman for the U.S. mission said.

Trump turned to Twitter after news of the launch, before North Korea’s claim the missile was an ICBM. He wrote: “Perhaps China will put a heavy move on North Korea and end this nonsense once and for all!” In response, China Foreign Ministry spokesman Geng Shuang said Beijing had been “indispensable” in pressuring Kim.

Reclusive North Korea has for decades relied on its weapons programs as a deterrent to outsiders. Kim is also no different from his father and grandfather — both leaders before him — in using his military clout as a bedrock for his internal power. Encouraging a personality cult around the Kim dynasty helps him keep a grip on generals at home and foster public obedience.

North Korea has called its weapons program a “precious sword of justice” against invaders. It has drawn comparisons with former dictatorships in Iraq and Libya, arguing that Saddam Hussein and Muammar Gaddafi fell because they gave up on developing nuclear arms.

The regime has also used provocations to secure concessions from neighbors in the form of aid. China, the main economic lifeline of North Korea, has been reluctant to press too hard in case it leads to the collapse of the regime and chaos on its border.

Tensions are rising between Trump and Xi over a broader range of issues. In a call with the U.S. president this week, Xi complained about a “negative” turn in ties. The U.S. has in recent days announced a $1.3 billion arms sale to Taiwan, published a report ranking China among the world’s worst human-trafficking offenders and called on Beijing to let ailing Noble Peace Prize winner Liu Xiaobo seek cancer treatment abroad.

North Korea is likely to dominate the Xi-Trump talks in Hamburg. Trump has said all options including military force are available against Pyongyang, though its neighbors warn a strike could be disastrous for North Asia. South Korea’s new government favors talks to bring Kim to heel, also putting it potentially at odds with Trump’s administration.

“The message North Korea is sending is simple: Whatever you do, our capability is getting greater and greater and we are not changing our policy,” said Andrew Gilholm, director of analysis for North Asia at Control Risks Group. “You are going to have to change yours.”

Following Tuesday’s missile launch, North Korea bragged it was a “full-fledged nuclear power” with ICBMs that can hit any part of the world. “The DPRK will fundamentally put an end to the U.S. nuclear war threat and blackmail,” it said, using an abbreviation for the nation’s formal title.

Kim’s actions don’t come without risks. Even Xi may have limits to his patience with the regime, especially if he risks appearing weak. And under Trump the U.S. has become more vocal about the potential for a military clash.

President of China Xi Jinping

“For Xi, North Korea is an affront to his image as a great leader on the world stage,” said Gilholm. “It is humiliating when he’s being ignored by a 30-something tin pot dictator just over the border. So China’s patience wearing thinner. There is a real chance they may squeeze harder than before.”

Still, Zhang Liangui, a professor at the Chinese Communist Party’s Central Party School, said that Kim made a “classy move” to manipulate relations between the major powers.

“The leaders from both sides need to be very careful to not let North Korea manage their relationship,” he said. “The ICBM launch could make an enormous impact on China-U.S. relations and even cause severe damage.”

By Ranjeetha Pakiam

(Bloomberg) — Gold will probably trade in a range of $1,200 to $1,300 an ounce in the short-term as the metal tracks U.S. real interest rates, according to UBS Group AG’s wealth management unit.

File Photo: 24 karat gold bars are seen at the United States West Point Mint facility. REUTERS/Shannon Stapleton/Files

“We’re not saying we have a bullish bias; we’re not saying we have a bearish bias,” Wayne Gordon, executive director for commodities and foreign exchange, said in an interview on Tuesday. “We’re saying that tactically, people should be buying it somewhere near $1,200 and selling it again somewhere near $1,300, and it’s because we have a view that real rates go sideways. So the pickup in nominal rates will be equally matched by the pickup in inflation.”

Bullion climbed almost 9 percent in the first quarter, buoyed by worries over Donald Trump’s presidency and geopolitical risks. Prices have since fallen and posted their first monthly decline this year in June. On Monday, the metal fell the most since November as equities and bond yields rallied, before North Korea’s launch of what the U.S. says is an intercontinental ballistic missile sparked a small rebound. The price was at $1,227.39 on Wednesday.

If U.S. unemployment keeps falling, and the Federal Reserve keeps raising interest rates no matter what the inflation data show, that will be negative for gold in the short term, Gordon said. Still, solid demand this year and weaker output, coupled with a lower dollar, are positive for prices, he said. If equity valuations start to drop, investors could turn to gold too, he added.

Gold could also act as insurance if the labor market doesn’t show further improvement in the U.S. and inflation doesn’t pick up, which would make the Fed pause on its tightening path, or if global growth slows, said Gordon. “We like the insurance qualities for gold just from an unknown perspective at these sorts of levels,” Gordon said.

Bullion has risen 0.6 percent in two days as North Korea’s rocket launch revives geopolitical concerns. U.S. Secretary of State Rex Tillerson called the act a “new escalation of the threat” and the United Nations Security Council plans a closed session later on Wednesday after the U.S. requested a meeting.

Gold will probably range from $1,150 to $1,350 in the second half, depending on how global equity markets perform, whether Trump can implement his agenda and the strength of the dollar, Robin Tsui, an exchange-traded fund gold specialist with State Street Global Advisors, said in Hong Kong Tuesday.

Investor holdings in the SPDR Gold Trust, the biggest ETF backed by bullion, have shrunk to 846.29 metric tons, the lowest level in almost three months.

By Netty Ismail and Michael G. Wilson

(Bloomberg) — The yen rose for a second day as Tuesday’s missile test by North Korea prompted responses from the U.S. and its allies, fueling demand for safer assets.

Leveraged accounts bought yen for dollars as South Korea and the U.S. held a missile drill in response to North Korea’s rocket launch, an Asia-based currency trader said. Treasury yields fell as trading resumed after the Independence Day holiday, while gold advanced. The dollar weakened as investors awaited minutes of the Federal Reserve’s June meeting.

“Geopolitics is back in front of investors’ minds, helping the bid tone in Treasury yields and yen,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney. Expectations for further U.S. rate increases and stronger economic data were setting the stage for higher Treasury yields and the dollar’s advance against the yen, “but the outlook has now been hampered by tensions in the Korean peninsula,” he said.

By Adam Haigh

(Bloomberg) — Asian stocks climbed as demand for haven assets ebbed even while geopolitical concerns remained in the wake of North Korea’s missile launch. European shares edged lower.

Japanese and Hong Kong equities reversed early declines as automakers and technology companies rose and the yen erased gains. Gold stayed higher amid lingering worries that North Korea is closer to building a device capable of hitting the U.S. Oil fluctuated after climbing for eight straight sessions. U.S. equity and bond markets are set to reopen after the July 4 holiday.

U.S. Secretary of State Rex Tillerson delivers a statement to the press on June 9, 2017.

The U.S. confirmed the rocket launched on July 4 was an intercontinental ballistic missile, with Secretary of State Rex Tillerson calling it a “new escalation of the threat” to the U.S. and its allies that would be brought before the United Nations Security Council. Markets in the past have shown a capacity to quickly move beyond periods of tension on the Korean peninsula following short bouts of risk aversion.

Elsewhere, the Federal Reserve is due to release minutes from its June policy meeting, the latest clues for investors on the path for U.S. interest rates ahead of Friday’s key jobs report. Equity investors this year have put their faith in a global economic recovery, helping spur all-time highs in global stocks, whereas bond buyers appear less sanguine on the outlook, doubting Fed rate-hike plans.