Gold has rallied 2.3% this week on the heels of renewed tension with North Korea. It is trading at its best level in two months, and is threatening to crack the $1,300 level for the first time since the day following the US presidential election.
Gold is viewed as a safe haven asset that investors flock to during periods of uncertainty. Amid this renewed flare-up in tensions with North Korea, Capital Economics decided to take a look at how the precious metal has responded to geopolitical risk events since 1985. What the research firm found might surprise you.
According to analyst Simona Gambarini, the price of gold “tends to rise in anticipation of a conflict but often falls when tensions turn into a full-blown war.”
Additionally, US-focused events tend to have a bigger impact. “This is mainly due to the fact that in the event of a crisis involving the US directly, investors are more likely to seek refuge in an asset like gold which bears no country risk and also benefits when the dollar depreciates,” Gambarini writes.
Finally, not every conflict impacts the price of gold. “Indeed, the biggest increases in the price of gold have occurred when the US bombed Libya in 1986, in the wake of the Gulf War in 1990, and, more recently, when ISIS attacks put oil supplies in the Middle East at risk.”
As for where gold can go from here, Capital Economics says that "until there is some certainty as to how the current geopolitical situation will evolve, gold prices are likely to remain well supported and could even rise above $1,350 per ounce."
Interestingly, the charts are also pointing to the possibility of a jump in gold prices. On Thursday, DoubleLine Capital CEO Jeffrey Gundlach noted that gold's chart had a cup and handle pattern, and said it was "one of the most bullish" chart patterns out there.
Doing some basic technical analysis, a breakout above the $1,300 level puts a move into the $1,460 area in the crosshairs.
Gold is up 11% so far this year.
