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Five weeks ago gold was in decline and on course to break below $1,200 for the first time since early March. But since then it has staged a solid recovery, capped off by the sharp rally which began in the middle of last week. This last move saw gold come within a few dollars of $1,300 for a low-to-high rally of just under $90 (around 7%) since early July. It’s also worth noting the move in silver which has been even more pronounced - up 6% in a week.

Investors rushed to hoover up both precious metals as they sought out safe havens. This followed the escalation in tensions between the US and North Korea. Last week President Trump warned that North Korea faced “fire and fury like the world has never seen.”  This followed the announcement that the dictatorship was preparing to fire missiles towards the US territory of Guam in the Pacific. President Trump went on to tweet that: "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely. Hopefully Kim Jong Un will find another path!" Back in July North Korea caused international outrage when it undertook two intercontinental ballistic missile tests.

But earlier today gold pulled back from its best levels. Investors were relieved that there was no escalation in the bellicose rhetoric over the weekend. In addition, CIA chief Mike Pompeo and National Security Advisor General HR McMaster both said that conflict with North Korea was not “imminent”.  Meanwhile in an opinion piece for The Wall Street Journal US Secretary of State Rex Tillerson and Secretary of Defence James Mattis made it clear that the US was looking to denuclearise the Korean peninsula by negotiation and was not looking at regime change.

But it may still be too early to sound the all-clear. Tomorrow North Korea celebrates Liberation Day which marks the end of Japanese rule. There’s always a possibility that Kim Jong-un may take this as an opportunity to do some grandstanding. The North Korean leader has already indicated that the country was preparing to undertake some action in mid-August. This should all go some way to supporting gold in the near-term. Meanwhile, the technical picture for gold is ambiguous to say the least. A look at the chart shows how gold appears to be topping out above $1,280 for the third time this year. This could turn in to a triple top which is a classic reversal pattern. On the other side of the argument bullish investors will point to a series of higher lows made since December 2015. Nevertheless, gold really needs to break and hold above $1,300 before the end of this month to set itself up for more significant gains. 

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Posted by David Morrison

Category: PM Bulletin


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