Article / 15 August 2017 at 9:36 GMT

Gold retraces as N.Korea risk premium deflates

Head of Commodity Strategy / Saxo Bank
Denmark
  • Easing of North Korea tensions has cut risk premium on gold and other safe havens
  • Gold is reacting to a falling JPY, rising stocks and yields
  • These developments have forced a reduction in bullish bets by funds
  • Spot gold today has found support at $1,272/oz after retracing half of latest rally

Pyongyang revolution monument
 Revolution monument in Pyongyang. Fears of a US-North Korean conflict have eased, 
sending safe-haven asset prices lower. Photo: Shutterstock

By Ole Hansen

Last week,gold faced an almost binary outcome between profit-taking or an extension above key resistance, depending on which direction the North Korean stand-off took. Since then, efforts on both sides have managed to lower the tension at least for now. In particular, the North Korean leadership overnight stepped back from its confrontational rhetoric with the US and scrapped plans to attack Guam.

Gold, like other safe-haven assets, has suffered as consequence, with the USDJPY rising further after failing to break key support just below 109 last week. Stocks have once again proved unable to string together more than a couple days of weakness before recovering strongly.

In addition, the bond market and the US dollar both reacted to a hawkish tilt from the New York Fed's Dudley, who said yesterday in an interview that it isn't unreasonable to expect the announcement of reduction of the balance sheet in September. He also said that the next four to six months are pivotal for whether the recent softness in the CPI is merely due to one-off factors. 

These developments have once again forced a reduction in bullish bets by funds, which during a three-week period to August 8, bought 11 million ounces of gold above $1,254/oz. Although the current net long of 13.9 million ounces is only half of the peak seen during the past 12 months, it is the speed of the buying that once again poses a challenge. 

Gold drivers
 
North Korea will continue to create worrisome headlines, but for now the focus in the gold market is firmly back on trying to establish support. Much will depend on whether investors perceive the current uncertainty as warranting continued safe-haven demand and diversification.

Having seen two thwarted bull runs within the past four months, short-term traders will now be looking at the downside as the path of least resistance. But spot gold has so far today found support at $1,272/oz after retracing half of the latest rally that kicked off following US president Donald Trump's "fire and fury" warning to North Korea.

Spot gold with retracement levels
 Source: Saxo Bank


— Edited by John Acher

Ole Hansen is head of commodity strategy at Saxo Bank

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