Daily Management Review

Trump And Not North Korea Tensions Are Pushing Up Gold Prices: Goldman Sachs


09/07/2017




Trump And Not North Korea Tensions Are Pushing Up Gold Prices: Goldman Sachs
Investment banker Goldman Sachs has said in a research note that North Korea tensions aren't actually what's driving the rally in gold despite many claims to the contrary.
 
Instead, the demand and value of the yellow metal has been inspired by the uncertainty over trade and business created by President Donald Trump, the bank said.
 
According to Reuters data, touching its highest levels in around a year, spot gold has climbed from levels under $1,212 an ounce in July to as high as $1,342.90 this week, and it has certainly rallied of late.
 
Gold was at $1,338.50 an ounce at 9:41 a.m. HK/SIN on Wednesday and this metal has traditionally acts as a safe-haven play when investors turn nervous.
 
Increased tensions on the Korean Peninsula, including when North Korea claimed a successful hydrogen bomb test on Sunday, coincidentally happened with some of the metal's gains.
 
However, the North Korean tensions was some what related to the rally in gold, Goldman, however, thinks but added that this development accounted for just around $15 of the more than $100 rally and the rest of the rally cannot be explained by the incidents.
 
"We find that the events in Washington over the past two months play a far larger role in the recent gold rally followed by a weaker dollar," it said. The bank added that it is the reason that the yellow metal likely wouldn't hold its gains.
 
Goldman said it was sticking with an end-of-year gold forecast of $1,250 an ounce barring a "substantial" escalation of North Korean tensions.
 
Correlating with both interest rates and gold prices, Trump's approval rating was a good proxy for Washington risks, it said. it said that around 85 percent of gold's recent rally was accounted for it together with a weaker dollar.
 
Still, it added, that risk was set to fade.
 
"In coming months, the unfortunate aftermath of hurricane Harvey suggests that Washington is going to have to overcome their differences, pass spending bills, try harder to avoid a government shutdown and pursue infrastructure projects sooner than later," it said.
 
The estimate of the probability of a government shutdown has been reduced to around 15 percent from 35 percent by Goldman.
 
Gold as a good hedge doesn't respond too much to geopolitics after controlling for macro variables on the average, the bank said, adding that gold can offer a good hedge against global risks when the event leads to a debasement of the dollar.
 
Goldman said that it means that the situation on the Korean Peninsula wasn't likely to propel gold much.
 
The bank added that suggestions that it still viewed military escalation and disarmament as tail risks, are expressed by North Korean tensions which were "very serious," but the market wasn't adding much of a risk premium.
 
"North Korea may not really have an incentive to launch an attack as this would likely lead to retaliation. But it is also unlikely to give up nuclear capabilities as it likely sees them as a guarantee of its safety," it said. "As a result, from game theory perspective, it is a stable equilibrium."
 
(Source:www.cnbc.com) 






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