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A geopolitical insurance

The silence around North Korea since its successful test of long haul missiles last September is a clear indication that China is handling the issue.


goldGraph(Source : Bloomberg)

Beyond the North Korean “standstill”, a number of reasons explain this pullback, the most important being that US short term interest rates are on the rise, reducing gold’s relative investment attractiveness and causing a sharp drop of inflows into gold ETFs. Demand from the jewellery business has also declined (mainly in India due to tax and regulatory changes), but demand for coins and bars is on the rise again (especially in China at prices below USD 1300), as is demand from the chip sector. As for central banks, they remain active buyers. All told, the gold market is thus relatively balanced, thanks also to a somewhat lower gold production (both mining and recycling).

The most volatile (and unpredictable) component of gold supply and demand are ETF flows, which set the price at the margin and are highly dependent on the “fear factor”. Renewed tensions between North Korea and the US, an accident in the Middle East or a sudden correction in financial markets could result in a flight to safe-haven assets. Keeping some gold and/or goldmines in portfolios as an insurance against such (unpredictable but not entirely impossible) events seems a sensible proposition, as part of normal (and wise) risk management.