Gold Prices: North Korea & the Hurricanes’ Impact

Hurricane Harvey

Last week gold broke through into a new trading range.  GLD, our ETF gold trading proxy, broke above 126 and bounced off 128.  People say gold is difficult to trade and hard to understand, which can be very true for the short term.  But in retrospect, gold prices painted a fairly simple picture these last couple of months.

Chart of gold prices

(Credit: Fidelity)

What the chart shows is a fairly standard range-bound situation pretty much through August.  Then came a breakout, which has continued through last Friday.  Confusing signals led many traders to stay mostly on the sidelines, which may yet turn out to be a good thing.

The real question is: What happens next?

And the answer is: We don’t know!

When an equity breaks into a new trading range, trading logic would demand you put on a small position, or tighten up your stops to protect any paper profits.  That’s the technical side, what about the fundamentals?

North Korea and hurricanes Harvey and Irma are often cited for “causing” the recent gold run-up.  In reality it’s not those events themselves but the implications and fallout that count.  The North Korean situation creates a lot of instability, so people want to hunker down and store wealth in safe-haven assets. This behavior should persist even if their local situation goes awry.

The hurricanes are a bit more subtle. The effect on gold prices is not directly due to the destruction, but where the clean-up and recovery funding comes from.  Usually in big natural disasters, the federal government throws a whole lot of money and people at the recovery effort.  Since we’re not running a Federal budget surplus right now, this means increasing the deficit. This in turn reduces overseas confidence in the US dollar.  

And this, of course, results in an increased value for gold in dollars.

Shanghai stock exchange Related: Exactly How Much is Gold Demand in China? 

While some analysts and prognosticators are predicting $5000 gold in the coming years, your friendly Gold Enthusiast is still taking a longer-term and possibly more rational view.  The factor we tend to forget in times like this is that politicians will do whatever they have to to stay in power.  This has been true for so long it’s almost a basic law of physics.  They’ll play card-shuffling and bean-hiding tricks all day long in their efforts to kick intractable problems down the road, and into someone else’s term in office.

Yes, Harvey and Irma are going to cost a lot of money.  And, national politicians are likely to enact huge relief funds to help the people affected.  But, we’ve been down this road before, and gold prices typically back off if the most recent disaster wasn’t as bad as expected.  So, with Irma thankfully not destroying Florida to the extent predicted, we can expect the metal to decline this week.  Short-term trades might see some losses, but keep the long game in view and you should do just fine.

Signed, The Gold Enthusiast

DISCLAIMER: The author has no positions in any security mentioned in this article.  The author is long NUGT and JNUG, and may trade these at any time in the next 48 hours.

Hurricane Irma Related: Will Hurricane Irma Affect the Gold Market? 

About the author

Mike Hammer

Mike Hammer has had a wide-ranging career, with trading and investing as a continuing theme. Mike graduated from UC Berkeley with a business degree, then worked with Macy's in their operations arm. He left Macy's and spent a summer trading his own account, which taught him a lot about trading in general and markets in particular. Trading through the Black Monday and the Crash of 1987 showed him how most people are unprepared for upheavals in their trading. He then joined Waddell & Reed as a financial advisor, helping regular people understand their finances and meet their life goals.

Then came the usual story - Mike met and married the lady of his dreams. They moved to upstate New York, where Mike worked first for a small manufacturing consulting company, then Cornell University. While loving the work and the higher-education atmosphere, Mike missed the world of finance. Eventually, he signed up for stock trading coaching with the Adam Mesh Trading Group, to learn from people who understood modern markets. Within a year, Adam asked Mike to become a stock trading coach.

Since then, Mike has trained over 200 individuals, spoke at several national conventions, and is a frequent contributor to conference calls across the Adam Mesh community. Mike writes The Gold Enthusiast daily newsletter, runs the Golden Hammer trading service, and participates in the Mesh Private Portfolio. He also keeps a position in international education which keep him in touch with "the student mindset". Mike closely follows the gold, energy, and financial sectors. His motto is "Plan your trade, then trade your plan!"

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