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A geopolitical insurance

North Korea’s successful tests of long-range missiles and the fear that this country has developed a nuclear bomb propelled the gold price from its July low of about USD 1,210/ounce to some USD 1,350/ounce in early September.

Gold mining stocks benefited from this ca. 10% gold price increase, with the trio of “safe” companies that we mentioned in July (Barrick, Gold Corp and Newmont Mining) gaining between 15% and 20%.

goldGraph(Source : Bloomberg)

Gold itself being a difficult asset to value – too many unpredictable variables influence supply and demand – professional investors with “computer-aided trading systems” tend to focus on “charts” and “technical analysis” to determine the short-term evolution of its price, rather than “fundamentals”. And right now, gold’s “technical picture” does not look bad at all: the USD 1,300 “resistance” was broken and has become a “support”, meaning that the gold price will encounter difficulties in falling below this level. On the other hand, USD 1,400 seems a maximum target for the time being, since this level represents a very, very strong “resistance”. Gold seems thus to be range-bound between USD 1,300 and USD 1,400 for the foreseeable future, unless something happens in the real world that disturbs the “charts”. Possible such events could be military action in the Far East, a policy mistake by one of the central banks or any other black swan.

Keeping some gold and/or goldmines in portfolios as an insurance against such an (unpredictable but not entirely impossible) occurrence is part of normal (and wise) risk management.