What Can You Do About This Recurring Crisis?

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The North Korea nuclear missile saga just keeps on rolling…

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The previous episode was aired in April of this year, resulting in Russia’s Security Council chief, Secretary Nikolai Patrushev, accusing “external provocateurs” of bringing the Korean peninsula to the “brink of war”.

This was in response to escalating tensions brought about by a failed ballistic missile test from the North Koreans, U.S. President Donald Trump’s deployment of warships towards the Korean peninsula – and of course plenty of heated rhetoric from both sides thrown in for good measure.

Back then, my colleague Kim Iskyan called it right, arguing that that particular unfolding crisis would end no differently from the many others that had preceded it… with a whimper, not a bang.

Deja-vu all over again

But only a couple of months later the drama fired up again when, on July 4, the North Koreans conducted an intercontinental ballistic missile (ICBM) test, with leader Kim Jong-un declaring it a “gift” for “the American [sons of unmarried women]” on their Independence Day holiday. He added that it was capable of carrying a nuclear warhead to the continental U.S.

Since then, the rhetoric has escalated substantially, hitting a crescendo earlier this month with Donald Trump stating last week that “North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen.”

Once again, the media was filled with North Korea crisis headlines, “China says N Korea missile threat near ‘crisis point’,” warned the Financial Times. The Wall Street Journal explained, “How Seoul Would Defend Itself Against a North Korean Attack”.

And Internet searches for “North Korea Crisis” likewise spiked dramatically, as this graph shows.

In financial markets, we saw global equities (measured by the MSCI World index) fall by just over 2 percent earlier this month, and U.S. equity market volatility spiked, with the VIX “fear gauge” indicator jumping from slightly less than 10 to over 16.

Recurring Crisis

You’ll notice there was a similar spike in volatility during the April escalation of North Korea tensions with the U.S. (along with an increase in Google searches as well as per the above chart).

As an investor, should you even care?

As Kim pointed out back in April, the escalation and subsequent cooling of U.S.-North Korea tensions is far from a new phenomenon. This kind of back-and-forth has been going on for years, and the end result has been the same – peace reigns.

As a result, it’s easy to be pretty casual about the threat that North Korea poses – since thus far, things have always ended up fine.

I don’t claim to be an expert on North Korea, but the simple fact is this: North Korea’s militaristic advances towards nuclear armament appear to be continually advancing, despite repeated attempts to stop them.

As David Albright from the Institute for Science and International Security put it in an excellent presentation on North Korea’s nuclear capabilities, “The bottom line is that North Korea has an improving nuclear weapons arsenal”.

In other words, this is a geopolitical issue that will continue to repeat itself. What’s more, it’s happening more frequently.

As the chart below clearly shows, North Korea has increased the frequency of its missile testing significantly under the leadership of Kim Jong-un.

Recurring Crisis

What should you own if the worst happens?

It is extremely difficult to price in the kinds of geopolitical risks we are talking about here with regards to North Korea. Just take this recent excerpt from Ray Dalio, Head of Bridgewater Associates and one of the most-renowned and respected global macro investors in the world today:

“The emerging risks appear more political than economic, which makes them especially challenging to price in…

“It’s hard to bet on such things, one way or another, so the best that one can do is be neutral to such possibilities…

“When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don’t have a unique insight that we’d choose to bet on…”

So, the guy at the helm of a US$150-billion-dollar global hedge fund says he finds it as hard as the rest of us. He continues:

“We like to hedge our bets, though we are never completely hedged. We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest that you relook at this.”

Gold has slipped off investor radars recently, as the S&P 500 has continued to rally, Asian stocks are up double digits this year, and bitcoin is going vertical.

But now is the time to make sure that a) you have some gold in your portfolio, and b) if you do, that you have a meaningful allocation of at least 2-3 percent at a bare minimum.

Gold is a safe haven – and in today’s geopolitical environment, it’s wise to pre-load some safety into your portfolio while you can.

If North Korea maintains this increasing rate of provocative missile testing, you'll likely be glad you own some gold.

Good investing,


Related Links:

  • War with North Korea is in the air. But it’s not… and we can learn from it
  • In this market, corruption and scandal = good investing
  • What to expect from the rumble in the Palm Beach jungle

Article by Stansberry Churchouse

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