War and Safe Havens: Gold & Currencies

04/25/2017 2:48 am EST


Jon Strebler

Editor, Dow Theory Letters

Things are heating up on the military front. Both the US and Russia are taking a hard line (so far) over what’s happening in Syria, explains Jon Strebler, editor of Dow Theory Letter's speciality trading service Strebler's Perspectives.

North Korea could easily make Syria look downright friendly, as a US carrier group is on its way there, following some pretty harsh language out of the US over N. Korea’s nuclear weapons development.

How far the Trump administration will take things, how Russia, Iran, and N. Korea will respond, how much the US’s allies will back our plays and China’s reaction — these are all unknowable at this point. As is gold’s reaction to these potentially very serious “just in case” kind of actions.  

The recent “one off” missile attack against a Syrian base was initially viewed by many in the West as appropriate, and Russia – realizing this – seemed unlikely to really get into it with the US over this minor response. Gold rallied a bunch, and then settled back, reflecting this rather benign view of it all.  

Syria is flying attacks out of that same base again and Russia is warning the US not to do anything more about it. Kim Jong Un seems to have a death wish, basically daring the US to do something about his nuclear tests, and the Trump administration seems to be considering whether to accommodate his wishes, which might turn big chunks of the Korean Peninsula into a dead zone.

Gold’s reaction will be of great interest, both for what it tells us about the yellow metal’s internal strength, but also about the chances for things to continue heating up or else settle back down again in those two world hot spots. 

chart 1

Here’s gold at the end of last week, having completed a quadruple-top breakout, but also close to reversing itself with a column of zeros. Quad-top breakouts are powerful critters, as we’ve seen before, and whether this one carries through on the upside or fizzles on the downside will be quite telling. We may know by the time you read this. 

The reaction of the other safe haven – the US dollar – could be telling also. Yet it is worth pondering how the normal flow into the US dollar in times of potential danger will be affected by the fact that this time the US is at the heart of that danger. Would money flow into the US if the US itself gets into a serious shooting war with Russia and/or N. Korea?


chart 2

In any case, here’s the dollar, also as of the end of last week. The operating thought here is that following the breakout above the horizontal maroon resistance line last fall, the buck is bullish as long as it stays above the blue upward trendline.

It has been trending lower short-term, as the maroon trendline shows. A break of one of these trendlines is inevitable, and should tell us where the dollar is headed in the coming months. 

Perhaps instead of money seeking the safe haven of the US dollar, it might seek refuge in the Japanese yen. In fact, that is a key story in today’s currency markets, as the yen has strengthened against the dollar on “international tensions.”

I’m not sure that Japan is where I’d want my money to be if war breaks out in Korea, though. I still like the gold thing when it comes to safe havens.  

chart 3

This chart pits the Japanese yen against gold in relative strength. So as strong as the yen has been, this chart shows gold being even stronger.

The trend, in other words, is in gold’s favor, not the yen’s. Should war (heaven forbid) break out in N.E. Asia, we might expect the 2016-2017 lows in this ratio to be shattered, in line with a pretty big run into gold by shaken investors. 

In late notes for this week, stocks were down hard and then rallied to leave key indices still looking OK, though gold closed very strong.  Tentatively, I would suggest that this completes a breakout for gold that should lead to further gains in the weeks and months ahead.

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