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What Effect Would a War with North Korea Have on Gold Prices?

Jul 29, 2017 | Peter Christensen |

What Effect Would a War with North Korea Have on Gold Prices?

What do you get when you take a nuclear-armed leader who’s a madman and a US President who likes to use provocative language against that madman? Some of the highest tensions between the two countries that have been seen in over two decades and a feeling of impending economic doom in the face of an almost unspeakable possibility: war with North Korea.

Now, the good news is that an actual war between the US and North Korea is still unlikely. Analysts, experts, and even the man on the street realize that any type of war with North Korea, whether with conventional or nuclear weapons, would result in a massive loss of human lives and in human suffering on a global scale. That being said, if a war did occur, the economic impact on the US economy and the world economy would be severe.

Experts say that, if a war does happen, the brunt of the conflict would be felt by North Korea and South Korea, but the economies of many other countries, including the US, would be significantly affected as a war would interrupt the worldwide supply chains of every type of product.

Oxford Economics makes their economic predictions about a Korean conflict

If a war were to happen, Oxford Economics, a leader in global forecasting and economic analysis, predicts that the economic impact on South Korea, China, and Asia as a whole would be massive. South Korean businesses would be devastated, as would China’s economy, as the region destabilizes. South Korea, Japan, and China would see a huge decline in equity prices, in a sharp sell-off of equities and bonds. External and domestic demand in Japan would be ravaged as consumer confidence around the globe declines sharply.

The cost of war for the US? Trillions of dollars

Economic experts agree that any war with North Korea would have a significant impact on the US economy as the war would cost trillions. They look to the last war on the Korean peninsula as proof—the US was spending 4.2% of its GDP to keep the troops in combat. With today’s adjusted numbers, the equivalent would be approximately $780 billion. They also point to the cost of 2003’s Gulf War, estimated at $1 trillion and the fact that a Korean war would create a domino effect on the world’s supply chains and economy, which would plummet.

The simple fact is that any prolonged military conflict with North Korea would have a negative impact on the economy, especially once the war ends and reconstruction begins in South Korea (assuming that the US is left unscathed). Infrastructure such as roads, ports, bridges, electric grids, and water supplies would all likely be destroyed and, thus, need to be repaired and/or replaced at a massive expense to the US. The cost of war itself can also escalate when you consider that North Korea has a formidable army with over 1 million soldiers and 5.8 million paramilitary personnel. A war with the rogue nation could drag on for months or years, further affecting the US economy.

What effect would a Korean war have on gold?

One of the big reasons investors love gold is that, during times of geopolitical tensions like these, gold increases in value while the prices of most other assets are negatively affected.

As you can see from the chart (below), gold prices rose after the Iranian Revolution and Russia’s invasion of Afghanistan (in the late 1970’s); the Gulf War in Iraq and Kuwait (during the late 1980’s to early 1990’s); and the September 11, 2001, attacks in the US.

In fact, even a hint of war can trigger a strong gold reaction as seen during the Syrian crisis and, more recently, the ongoing war with ISIS.

Experts predict that, with a North Korean conflict being a possibility, gold prices will once again surge as investors shift some of their assets to gold and other precious metals.

In short, gold is a historically proven way to protect your assets during times of global upheaval and war. While we all hope for a peaceful resolution to this alarming situation, increasing your gold assets and hedging your bets are still very good choices, investment-wise.