Gold drops as North Korea tensions subside – for now

Risk-sensitive assets created large gaps at the start of this week’s trading session in Asia overnight. Index futures gapped up before pushing higher which saw the Dow future gain more than 100 points. In contrast, safe haven gold, which had hit a new 2017 high on Friday, found itself around $15 lower when trading got underway. It looks like speculators who had established positions to take advantage of a possible rise in risk aversion, were left disappointed as North Korea did not conduct another missile test at the weekend. What’s more, a weakening of Hurricane Irma over the U.S. also dampened demand for perceived safe haven assets, and boosted the dollar slightly. However, North Korea tensions could rise again. The United Nations will be voting on new sanctions – proposed by the U.S. – against Pyongyang today. If approved by the UN Security Council, then North Korea stands "ready and willing" to respond with measures of its own, the North's Foreign Ministry has said. So, North Korea tensions are likely to linger which should keep demand for gold and other safe haven assets elevated.

From a technical stand point, gold’s weakness also makes sense, but so far it can only be interpreted as a mere pullback from overbought levels, rather than trend reversal. After breaking above the $1,300 level, the yellow metal went on to hit our next key target around the $1,350 area, where the top of the bullish channel converged with the 161.8% Fibonacci extension level of the last corrective downswing. But given the prospects of a ‘gap fill’ and the overall bullish structure of price, we wouldn’t be surprised if the metal continues to push higher towards $1,375 next – the 2016 high. Short-term support comes in around $1,325, followed by $1,300. But if gold falls below $1,290 then the bulls may be in trouble. Until and unless that happens, or price forms a distinct reversal pattern at higher levels, the path of least resistance for gold remains to the upside despite its immediate-term weakness.