KOREAN CRISIS AND ITS EFFECT ON THE GLOBAL METAL MARKET

International stability faces a growing threat from an aggressive and heavily militarized Democratic People’s Republic of Korea (DPRK, North Korea). For a variety of reasons, U.S. policy has failed to contain Pyongyang’s outsized ambitions to build nuclear weapons and delivery systems that can credibly threaten U.S. allies and military interests in Asia and ultimately the continental United States. Even though the program appears to be gathering momentum and reach, there is no evidence that the North has succeeded in developing a nuclear weapon compact enough to be delivered by a North Korean missile or a re-entry vehicle that could fly the weapon to its target and detonate. Kim Jong-un’s statements of intent provide disturbing clues to the shape of the nuclear threat to come; the North is still a primitive nuclear power in terms of warheads and missiles, meaning that the United States and its partners must find ways to curb the North’s modernization trajectory now before it becomes unmanageable.

While Donald Trump is saying the US is “locked and loaded” for war with North Korea, Kim Jong-un’s regime is brandishing missiles and nuclear bombs. Developments such as these are usually sufficient to spook investors enough to dump stocks and go for gold. But that’s not how it’s playing out this time.

According to data provided by Bloomberg, this is the first time in at least nine years that both gold prices and stock markets have rallied almost equally in the same period. Past data shows that Sensex and gold have an inverse relation in the same period, but the trend seems to have changed this year.

In 2017 so far, the Sensex jumped 19%, while gold prices gained 15.87% and silver was up 12%. In 2016, silver was the best asset class with gains of 14.86%, while gold was up 8.56% and the Sensex was up by marginally 1.95%, hit by demonetisation. According to analysts, besides geopolitical factors, weak dollar index and interest rates hike odds by the Federal Reserve have also led to increase in gold prices, while abundant liquidity kept the stock market’s rally alive.

Europe’s financial markets seemed in September to have shaken off jitters prompted by North Korea’s biggest nuclear test yet, with stocks pushing higher and investors reversing out of bonds, gold and other safe-haven assets.

As with many political risks play over the past couple of years, market moves suggested a reluctance to price in tail risks on every possible bad outcome and more of a focus on the prosaic but upbeat global economic picture. Gold - the traditional go-to for traders when political concerns escalate - eased too, dipping back from a one-year high in its first drop in four days, last week.

Fears of nuclear war escalated as Kim Jong-un's rogue state revealed an air strike on the US. In reaction demand, for safe havens have leapt and riskier assets such as stocks and shares have plunged. Since the start of the week, gold prices are up by more than two per cent since the beginning of August. The precious metal price is now sitting at around $1,291 - the highest level since June - rising by around one per cent in a day alone.

Silver prices are also going up, as well as demand for other havens including US government bonds and the Japanese yen. Experts said gold prices could surge even higher in the coming days. Analysists predict that gold could surge above $1295. They said, "Gold is looking increasingly bullish from a technical standpoint."

he Pure Gold Company reported sales increases of 125 per cent in early August as tensions between the USA and North Korea intensified.

Another Asian economy that could be heavily impacted by the crisis with North Korea is China. China’s position is ostensibly against North Korea, and there has been a ban in place on importing coal from North Korea since February. China has warned North Korea against taking actions that further increase tensions with the rest of the world, however they did show a 37 percent trade increase with Kim Jong-un’s state in the first quarter of this year. Trump does not approve, and has stated that as US sanctions against North Korea are implemented, Chinese banks and businesses who deal with North Korea may be penalized.

About 40 percent of the world’s finished and semi-finished steel exports originate from China, South Korea and Japan. The three countries also account for about 84 percent of the world’s iron ore seaborne trade, according to Citigroup, and 47 percent of the world’s seaborne imports of metallurgical coal, according to UBS Group AG.

An attack on the US or its allies would be suicidal, so Pyongyang probably aims to extract “aid” from the international community in exchange for dismantling some of its weaponry—rewind about 10 years to see the last time it pulled off the old “nuclear blackmail” trick. But however much North Korea could extract from other nations that way, the result would pale in comparison to the value of its largely untapped underground resources.

Below the nation’s mostly mountainous surface are vast mineral reserves, including iron, gold, magnesite, zinc, copper, limestone, molybdenum, graphite, and more—all told about 200 kinds of minerals. Also present are copious amounts of rare earth metals, which factories in nearby countries need to make smartphones and other high-tech products.

North Korea has prioritized its mining sector since the 1970s. But while mining production increased until about 1990—iron ore production peaked in 1985—after that it started to decline. A count in 2012 put the number of mines in the country at about 700. Many, though, have been poorly run and are in a state of neglect. The nation lacks the equipment, expertise, and even basic infrastructure to properly tap into the jackpot that waits in the ground.

Estimates as to the value of the nation’s mineral resources have varied greatly over the years, made difficult by secrecy and lack of access. North Korea itself has made what are likely exaggerated claims about them. According to one estimate from a South Korean state-owned mining company, they’re worth over $6 trillion. Another from a South Korean research institute puts the amount closer to $10 trillion. Despite all this, the nation is so blessed with underground resources that mining makes up roughly 14% of the economy.

China is the sector’s main customer. Last September, South Korea’s state-run Korea Development Institute said that the mineral trade between North Korea and China remains a “cash cow” for Pyongyang despite UN sanctions, and that it accounted for 54% (paywall) of the North’s total trade volume to China in the first half of 2016. In 2015 China imported $73 million in iron ore from North Korea, and $680,000 worth of zinc in the first quarter of this year.

North Korea has been particularly active in coal mining in recent years. In 2015 China imported about $1 billion worth of coal from North Korea. Coal is especially appealing because it can be mined with relatively simple equipment. Large deposits of the stuff are located near major ports and the border with China, making the nation’s bad transportation infrastructure less of an issue.

For years Chinese buyers have purchased coal from North Korea at far below the market rate. As of last summer, coal shipments to China accounted for about 40% (paywall) of all North Korean exports. But global demand for coal is declining as alternatives like natural gas and renewables gain momentum, and earlier this year Beijing, in line with UN sanctions, began restricting coal imports from its neighbour.

China particularly covets North Korea’s rare earth minerals. Pyongyang knows this. It punished Beijing in March by suspending exports of the metals to China in retaliation for the coal trade restrictions.

Meanwhile Russia, which also shares a border with North Korea, in 2014 developed plans to overhaul North Korea’s rail network in exchange for access to the country’s mineral resources. That plan lost steam, but the general sentiment is still alive.

But South Korea has its own plans for the mineral resources. It sees them to help pay for reunification, which is expected to take decades and cost hundreds of billions or even trillions of dollars. Overhauling the North’s decrepit infrastructure, including the aging railway line, will be part of the enormous bill.

According to the Foreign Policy Research Institute report, the 2016 UN Security Council resolutions also made a quasi-credible effort to hamstring Pyongyang’s legal foreign commerce, banning exports of rare earth minerals and of seven different non-ferrous metals and extending the ban to coal and iron, the North’s main money-earning commodities. More effective were provisions designed to cut the North’s ties to the international financial system. Among other things, these provisions disallowed correspondent relations between DPRK banks and foreign banks and required member states to close existing bank branches and representative offices on DPRK territory.

Overall, the most devastating impact of the Security Council resolutions may have been on foreign investment. Heavy sanctions on North Korea made it difficult or unrewarding to do business there. Especially harmful were bans on exports of valuable metals (rare earths, gold vanadium, and titanium, in Resolution 2270; and silver, copper, nickel, and zinc in Resolution 2231). By way of example, following adoption of Resolution 2270 (March 2016), Russia severed banking ties with the North and suspended or buried many large investment projects that, if implemented, would have transformed the face of the North Korean economy. One reason cited was that the North Koreans couldn’t come up with the funds to compensate Russia for its investment expenses.

The effects of the North Korean situation on their trade, currencies and share dealing have an impact all over the world thanks to their dealings with China, Japan and South Korea, which have significant repercussions on international financial markets. Equally, as the US seems to be prepared for the eventuality of the ‘cold war’ with North Korea turning quite quickly into an actual war, America’s economy—and therefore the economy of the West—is far from safe from significant North Korea related volatility.



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