Using Gold To Hedge Korea Nuclear War Risk? This Is How To Do It, According To Goldman
In a note on the role of gold as a “geopolitical hedge of last resort“, Goldman chief commodities strategist, Jeff Currie, writes that while it is tempting to blame the rally in gold prices on recent events in North Korea – which have certainly helped create a bid in gold – they only explain a fraction, or ~$15/oz of the more than $100/oz rally since mid-July. Instead, Goldman finds that the events in Washington over the past two months play a far larger role in the recent gold rally coupled by a sharply weaker dollar.
Currie writes that Goldman’s market strategists have found that Trump’s approval rating is a good proxy for this “Washington risk” with a high correlation to both interest rates and gold prices (see Exhibit 1).
The Washington risk premium is highly correlated to Trump’s approval rating
Goldman also notes that the Trump risk premium is reflected in both real interest rates and a weaker US dollar account for 85% of the price movement in gold prices this past year.
The Trump risk premium as reflected in real rates and the US dollar (as reflected in a basket of EM FX) explain 85% of the price movement
So what about the risk, or threat, from a North Korean escalation, potentially culminating with a nuclear exchange? Here Goldman is more skeptical about the causal linkage between the growing risk level and the price of gold.
The view that North Korea is a stable equilibrium is consistent with a lack of a large North Korean risk premium in gold prices and consistent with the history of gold prices.
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