15
Sep
2017

Gold Up, Markets Fatigued As War Talk Boils Over

  • North Korea threatens to reduce the U.S. to ‘ashes and darkness’
  • Markets becoming used to ongoing provocations from North Korea
  • Russia and China continue to support watered down versions of sanctions on Kim’s regime
  • Both NATO and Russia running war games on one another’s borders
  • Putin says Russia will give a suitable response” to NATOs threatening behaviour
  • Gold set to climb as fears over economy and war will drive safe haven demand
Missile fatigue

Source: Bloomberg

This year North Korea has launched a dozen missiles. With the latest one it has threatened the U.S. with ‘ashes and darkness’ as Kim believes it ‘should be beaten to death like a rabid dog.’

Russia and China continue to support watered down sanctions on the isolated country. Both have made it clear that they will not tolerate a war on their borders.

War talk is not just about North Korea anymore.  NATO and Russia have been or are currently carrying out war games on one another’s borders. Both parties feel the other one has acted unreasonably in doing so.  U.K. Defense Secretary Michael Fallon has accused Russia of deliberately provoking NATO, whilst Putin has said Russia has no other choice than to “give a suitable response to all of these actions,”

Russia has previously used military exercises as a cover for what has ultimately been invasions and war. See Georgia in 2008 and Ukraine in 2014 for the most recent examples.

Saber rattling is quickly looking like its going to become full-blown sword fighting at least somewhere in the world.

But few seem to be worried. Markets are not only apparently fatigued by the war cries of the world’s nuclear powers but are evidently ignoring the risks in the financial system.

Gold is currently up over 15% for the year, silver by nearly 12%. Both offer financial safe havens during times of war. All parties involved in the current geopolitical fracas are big holders of gold. Two of them, Russia and China are enabling the trade of the precious metal for key commodities.

Markets would be wise to look at how our great leaders are behaving before deciding that there is little to currently see on the global stage.

The four nos

On Monday UN representatives of both Russia and China reiterated what they refer to as “the four nos”: No regime change, No regime collapse, No accelerated reunification or military deployment north of the 38th parallel dividing the Korean Peninsula.

Neither China nor Russia see any advantage in heavily punishing North Korea whether through sanctions or military action.

They recognise the regime’s need for security guarantees from the U.S. before Kim is likely to stop with his nuclear missile program.

Both Putin and Xi Jinping have an incentive to prevent the U.S. from going to war with North Korea. Both are the biggest economic partners of the dictatorship. Neither wish to see a war on their borders that will only serve to protect and expand American strategic interests.

Both China and Russia are aware of both the economic and military power they currently wield . The situation is very different to say 20 years ago when the West was significantly ahead on all levels, when neither Russia nor China were able to compete on either front.

Tensions are coolest they’ve been since Cold War

Russia and China are clearly not happy with Kim’s nuclear ambitions. However it seems that currently it is more important for those classed as anti-Western to work together and thereby gain more influence in the international order.

Russia has its own problems with sanctions. It has been under them since the U.S. and European Union sanctions for its annexation of Crimea in 2014, its continued invasion of eastern Ukraine, and the shoot-down of Malaysian Airlines Flight 17 in July 2014.

It is perhaps the case that helping North Korea stand firm against the U.S and the U.N. is perhaps as much a matter of principle as it is strategic.

Refusing to give into Western calls for tougher sanctions on Pyongyang is perhaps more a statement of Putin’s insistence that he will not give in to demands regarding his own military activities in both Crimea and Ukraine.

This week Russia is hosting large scale military drills on the border of three NATO countries. The drills (known as Zapad 2017) have been happening every year since 1999.

They have been growing in size since, especially as relations between Moscow and Washington grow every frostier.

The Moscow Times explains:

Military exercises like Zapad and other demonstrations of military power are designed, in part, to provide coercive credibility that any attempt by the United States to undermine core Russian security interests will be met by force and will extract a high cost.

Along with Zapad 2017 and defence of North Korea, Putin has been chest beating for some time now. It has carried out major propaganda operations across the West, tested other countries’ airspace, and supposedly hacked the US and French elections (watch out Germany).

In response NATO has  taken several steps to warn Russia off. It has sent four multinational battalions to rotate around the Baltics and Poland. In 2016 NATO members deployed around 30,000 troops in Poland, this was apparently its largest  military exercise in eastern European since the end of the Cold War.

Zerohedge explains that Zapad isn’t the only war-game going on:

just days before the dreaded Russian “Zapad 2017” exercise is set to begin, NATO’s own Steadfast Pyramid 2017 military exercise kicked off in Latvia on Sunday, with 40 senior commanders from NATO states, as well as Finland and Sweden. They are expected to train how to “plan and conduct operations” amid the bloc’s buildup in the region.

Steadfast Pyramid 2017 and Steadfast Pinnacle 2017, involving more than 40 senior officers from NATO member states, plus Finland and Sweden, will take place at the Riga-based Latvian Defense Academy, the country’s national news agency LETA reported on Sunday.

Covering the duration of Russia’s drills, Steadfast Pyramid, the first part of the exercise, will last until September 15. It is reportedly “to improve the ability of top-level officers and commanders to plan and lead joint operations,” according to LETA. Steadfast Pinnacle, the next stage of the drill, will last from September 17 until September 22. Steadfast Pyramid and Steadfast Pinnacle were first held in Latvia in 2011.  British General James Everard, the NATO Deputy Supreme Allied Commander Europe, is expected to arrive in Latvia to oversee both stages of the exercise, Latvia’s Defense Ministry said, according to LETA.

fictional war

Where is the risk with China?

China might not be warming up the tanks on NATO borders but it certainly yields significant economic power, despite what the U.S. might think.

As we explained last week:

Currently Trump is relying heavily on China to cool things down with Kim Jong-Un of maniacal despot fame.

In Keen’s latest book China is one of the countries he believes is a debt junkie. The country’s credit-driven expansion has accounted for more than half of global growth since 2008. Why? Because it dealt with the collapse of the Western credit bubble in 2008 by fuelling a bubble of its own.

Today Chinese banks have $35tn of assets on their balance sheets – a fourfold increase since 2008. In the last decade private debt as a proportion of the country’s annual economic output (GDP) has increased from 120% to 210%.

Its financial system could almost be a mirror to those seen in the US and UK in the run up to the financial crisis. It has a large shadow banking system and special investment vehicles that take assets off balance sheets.

How does this relate to Trump, North Korea and the next financial crisis? Trump needs China on side when dealing with Kim Jong-Un. However, last week Beijing said that in the event of war between the two nuclear powers it would sit on the sidelines.

Trump now has to decide how to handle China as the country clearly has its limits in how much it will help. The most obvious option would be to impose economic sanctions for example, slapping tariffs on steel imports. It could also put China in a negative light in terms of its dealings in markets such as going back to Trump’s old rhetoric branding the country as a currency manipulator or accusing it of facilitating illegal piracy businesses.

Should sanctions be imposed then a trade war would inevitably erupt. This eruption would firmly put a pin in China’s bubble and ripples would be sent out across the world.

Is the market slowly waking up to the risks?

Last week we brought you the news that Goldman Sachs is warning of bubbles. This week they have reissued their warning of ‘blue sky’ views on the state of the world.

“We believe it is the right time, when markets look at the blue sky with sunglasses and when the trend and carry is your friend, to recommend downgrading risk assets,” the SocGen analysts wrote.

We also explained yesterday about Russia and China’s monetary moves behind the scenes. Whilst the West distracts themselves with economic sanctions, interest rate hikes and booking stock markets the BRICs are finding ways to manage as far away from the system as they can.

What does this mean? Those doing much of the provoking, Russia and China, are fully aware of what comes with potential nuclear war and financial weapons – destruction of currencies and strength in gold.

Unfortunately Western markets aren’t picking this up (as you can see from the opening chart). Everything reacted slightly this morning to the North Korea news but otherwise fell back thanks to news regarding the US inflation data.

Buy gold before everyone wakes up

Gold has fallen back slightly this morning. However over the year it is one of the best performing assets. There is certainly a rising undercurrent of uncertainty and concern for how the next few months will play out.

As always, we still do not have a crystal ball to tell you how this will end. It may end in nuclear war, it may end with Russia invading Eastern European countries or it may end with a stock market crash.

The geopolitical disasters are of course preventable. However, the cracks in the financial system have been brewing for some time and there is little that can be done to fix them.

Dramas with North Korea, Russia war-games and Chinese economic concerns are just more pressure on an already crumbling wall.

Countries know this, this is why they’re buying gold and facilitating gold markets. Investors would be wise to follow their lead instead of following market complacency.

News and Commentary

Gold up after North Korea fires yet another missile (Reuters.com)

North Korea missile reportedly passes over Japan, lands in the sea (CNBC.com)

North Korea fires missile over Japan that lands far out in the Pacific (Reuters.com)

Gold ends higher to halt streak of declines (MarketWatch.com)

Bank of England May Hike Rates Within Months (Bloomberg.com)

source: https://www.bloomberg.com/news/articles/2017-09-14/north-korea-launched-missile-over-japan-toward-pacific-ocean

Bad news for savers – positive real interest rates are a long way off (MoneyWeek.com)

The Mexican Congress Debates the Monetization of the ‘Libertad’ Silver Ounce (Plata.com)

Could Market Complexity Trigger The Next Crash? (ZeroHedge.com)

America’s Weapons: “The Dollar and the Drone” (DailyReckoning.com)

Hugh Hendry: “Markets Are Wrong” (ZeroHedge.com)

Gold Prices (LBMA AM)

15 Sep: USD 1,325.00, GBP 977.32 & EUR 1,109.16 per ounce
14 Sep: USD 1,323.00, GBP 1,002.44 & EUR 1,111.58 per ounce
13 Sep: USD 1,332.25, GBP 1,003.85 & EUR 1,112.43 per ounce
12 Sep: USD 1,326.25, GBP 1,000.66 & EUR 1,109.41 per ounce
11 Sep: USD 1,338.75, GBP 1,015.31 & EUR 1,114.24 per ounce
08 Sep: USD 1,350.90, GBP 1,026.82 & EUR 1,120.71 per ounce
07 Sep: USD 1,340.45, GBP 1,026.52 & EUR 1,119.54 per ounce

Silver Prices (LBMA)

15 Sep: USD 17.70, GBP 13.03 & EUR 14.81 per ounce
14 Sep: USD 17.75, GBP 13.40 & EUR 14.91 per ounce
13 Sep: USD 17.91, GBP 13.50 & EUR 14.94 per ounce
12 Sep: USD 17.75, GBP 13.37 & EUR 14.87 per ounce
11 Sep: USD 17.85, GBP 13.51 & EUR 14.86 per ounce
08 Sep: USD 18.21, GBP 13.80 & EUR 15.09 per ounce
07 Sep: USD 17.79, GBP 13.59 & EUR 14.85 per ounce


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