Gold Price Consolidates, N. Korea Tests Nukes

September 9th, 2016 by

Friday morning saw the spot gold price shed about 0.4%, settling around $1,335 per ounce as the gold market consolidates its recent gains. Silver prices were off roughly 1%, trading above $19.45/oz.

The two biggest drivers in the news were yesterday’s inaction by the ECB and new nuclear tests in North Korea.

ECB Hangover

ECB President Mario Draghi

ECB President Mario Draghi

In response to the European Central Bank (ECB) decision to stand pat yesterday morning, stock markets in Europe and the U.S. opened in the red. Markets didn’t find Mario Draghi and the ECB’s outlook sufficiently dovish, as more of a QE “bazooka” was expected to combat stagnant growth. Instead, the euro advanced on the news.

The precious metals have tended to rise right along with the equities markets when one of the world’s major central banks announces new stimulus measures, so the pullback following the surprise from the ECB is in line with this trend. However, the reaction of gold and silver has generally been modest in these circumstances. Global markets had fully expected an aggressive stimulus announcement from Draghi, so the failure to meet this expectation should weigh on the stock markets during trading today.

North Korea Outrage

North_Korea_nuclearGold may see some safe haven demand as traders digest the big news this morning coming out of North Korea. The rogue regime flouted a United Nations (UN) ban on nuclear tests by detonating a 10-kiloton nuclear bomb underground this morning, which was accompanied by a tremor that registered 5.3 on the Richter scale. Some nuclear experts have suggested that the explosion may have actually been closer to 20 kilotons. (By comparison, the atomic bomb dropped on Hiroshima in World War II was a 15-kiloton blast.)

This is the second time so far this year that North Korea has defied the UN and the international community by testing new nuclear weapons. The last test took place in January and resulted in fresh sanctions from the UN, but the country’s leader Kim Jong-un has been undeterred by the penalties and general outrage. According to the BBC, “the isolated communist nation has been hit by five sets of UN sanctions since its first [nuclear] test in 2006.”

atomic bombThe main thrust of this test—after you cut through the habitually bellicose rhetoric from Pyongyang—is that North Korea is developing smaller and lighter (“miniaturized”) nuclear weapons, which could lead to the placement of these weapons on ballistic missiles. Although the regime has made claims of possessing such technology in the past, this may cause world leaders to take the threat more seriously. Naturally, the North Korean government is boasting that it can now produce these smaller explosives “at will,” though its assertions of military strength are often dubious.

It is noteworthy that in addition to Russia, Japan, South Korea, and countries in the West, China is also condemning the test. China remains North Korea’s only ally, but the People’s Republic did approve tougher sanctions as part of the UN’s Security Council after January’s nuclear test. Although China fears that toppling its communist neighbor would give the U.S. an opportunity to expand its influence in Asia, international pressure could sway it to support harsher punishment.


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