The US dollar was mixed on Monday – down against the safe-haven Japanese yen and up against the euro in the aftermath of Sunday’s German election – but was broadly higher overall against a basket of major currencies. Despite this renewed strength in the greenback, which has been driven largely by increased expectations of a December Fed rate hike in the wake of last week’s hawkish FOMC meeting, the price of gold defied these factors and surged on a spike in safe-haven demand.
This quick rise was prompted by sharply increasing tensions between North Korea and the US on Monday, specifically after DPRK Foreign Minister Ri Yong Ho accused US President Donald Trump of having declared war on North Korea. Tensions had already intensified further recently after Trump and Ri addressed the United Nations at separate times within the past week, both issuing aggressive threats against each other’s country. Ri’s assertion on Monday that Trump had already declared war was followed by another threat from Ri stating consequently that North Korea now has the right to “make countermeasures” against the US, including by shooting down US bombers even outside North Korean airspace. US bombers had recently flown just outside North Korean airspace in a show of force over the weekend.
This abrupt escalation in a geopolitical situation that was already highly contentious led to a surge in demand for safe-haven assets including the Japanese yen and gold. In the case of gold, the flight to safety bucked the sharp downtrend of the past two weeks, which had brought the precious metal sliding down from the $1350 price area to break down below $1300. That slide was driven largely by the recent bottoming-out of the US dollar, increased expectations of Fed policy tightening, and a relative lack of global risk concerns. The former two factors have not changed – only a change in the third factor is potentially poised to dramatically impact the price of gold in a short period of time.
Of course, how the tensions between North Korea and the US (along with Japan and South Korea) may play out remains to be seen. Any further escalation towards war has the potential to boost the price of gold sharply higher towards new year-to-date highs well above $1350. Somewhat more likely, however, the tensions will eventually dissipate, at least from the market’s perspective. In that event, gold should likely return to being pressured by a stronger dollar and the specter of higher interest rates from the Fed. Any subsequent turn back down below the key $1300 level could see gold targeting the $1250 support level once again.