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How Far Is it from North Korea to Italy?

Commodities / Gold and Silver 2018 May 30, 2018 - 05:22 PM GMT

By: Arkadiusz_Sieron

Commodities

Almost 5500 miles ( 8,800 kilometers ) . That’s the distance between Pyongyang and Rome. It seems a lot, right? But not for gold, the truly global monetary asset. In recent days, the price of the yellow metal has immediately reacted to the developments around both North Korea and Italy. What has happened?


Love Is a Battlefield
As Pat Benatar beautifully sang, love is a battlefield. The same applies to the gold market. The chart below shows the price of gold in 2018. As one can see, the price of the yellow metal dived on May the 15th below $1,300… just to rebound several days later.

Chart 1: Gold prices in 2018 (London P.M. Fix, in $).


What happened? Well, gold plunged because of the rebound in the greenback. The U.S. dollar strengthened partially (aside the Eurozone’s problems and rising yields on American Treasuries) because of the eased conflict over the Korean Peninsula. President Trump was supposed to meet with the North Korean leader Kim Jong Un in June. But Trump pulled out of the June the 12th summit on Thursday, sending gold prices again above $1,300. Diplomatic negotiations are a battlefield. However, as the chart below shows, the jump was temporary and the price of gold has gradually fallen since Friday. As we constantly repeated, geopolitical factors in general, and threats from the North Korea in particular, have only short-lived and limited impact on the gold prices.

Chart 2: Gold prices (London P.M. Fix, in $) from May 25 and May 28.


Good Morning Italy with Your Elections
Fast teleportation to Italy with the spaghetti al dente, strong coffee, and political instability. On Monday, Italy’s President Sergio Mattarella nominated Carlo Cottarelli, a former International Monetary Fund official, as interim prime minister with the goal to pass the next budget and to plan snap elections in the autumn or early next year. The decision to appoint Cottarelli, was a surprising move, as it means a conflict with the anti-establishment forces which gained the majority of votes in March elections. President Mattarella vetoed the 5-Star Movement and League’s choice of a euro-sceptic Paolo Savona as economy minister, because he had threatened to pull Italy out of the Eurozone. He explains this move, saying:

The uncertainty over our position has alarmed investors and savers both in Italy and abroad. Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion.

Hence, President clearly wanted to calm financial markets. But it might be a bear’s favor. You see, snap elections may lead to an even stronger mandate for the country’s populist parties. The President’s decision might be interpreted as desperate and disrespectful for popular vote establishment’s maneuver to remain in power. It is grist for the populist’s mill. Hence, the euro declined again the U.S. dollar, as investors are afraid that anti-euro forces will strengthen in Italy.

And more weakness might come. The Italy’s snap election in autumn could create a problem to ECB which considers to start winding down its quantitative easing program by September. If the central bank postpones the reduction of its monetary accommodation, the U.S. is likely to strengthen further, putting the yellow metal under downward pressure.

Implications for Gold
As we have argued in our Gold News Monitor and Market Overview for a long time, gold behaves like a currency. But it’s not a typical currency, as it is not linked to any particular country or economy. Gold is a real international monetary asset, the ultimate safe haven against global turmoil. Indeed, on Thursday, its price jumped in reaction to Trump’s cancellation of the meeting with Kim Jong Un.

But it started to decline soon after, partially to the revived hopes that the U.S. President would eventually meet with the North Korean leader (investors should always remember about Trump’s unique negotiation and communication style). But the gold prices reacted also to the developments in the Old Continent, i.e. to concerns about the snap election in Italy. Adding to these worries was news that Spanish Prime Minister Mariano Rajoy would face a vote of confidence on Friday (as dozens of people linked to the ruling center-right People’s Party were convicted of corruption). Another potential hit for the euro. In consequence, Italian and Spanish borrowing costs relative to Germany’s increased substantially. So the U.S. dollar bulls should have a good time for a while. But we cannot say the same about gold bulls, at least in the near future. Investors should also remember that the Volcker rule might be soften soon, which should support the financial sector, reducing additionally the safe-haven appeal of gold. Stay tuned!

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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