Gold prices spiked higher on Monday, after North Korea’s foreign minister said that a tweet from US President Trump amounted to a "declaration of war". The continued intensification in rhetoric may have put the prospect of military conflict back on the investors’ radar, leading to a classic risk-off reaction in markets. Nonetheless, gold and other safe haven assets gave back most of their gains during the European morning Tuesday, as markets await the response from the White House. If the President responds in a "fire and fury" manner, then another round of risk aversion appears likely. On the other hand, a more diplomatic approach, such as an official statement, could lower the likelihood of armed conflict and thereby reverse some of the latest market moves.
Looking at the bigger picture, although more fiery rhetoric could keep safe assets supported for a while, we maintain the view that as long as this does not translate into actual war, investors are likely to place less and less emphasis on this crisis moving forward. Escalation in rhetoric alone will probably have a diminishing impact on financial markets.
Gold traded higher on Monday, breaking back above the psychological zone of 1300 (S1). Nevertheless, on Tuesday the price hit resistance near the 1315 (R1) line, and then it retreated to challenge once again the 1300 (S1) barrier, as a support this time. The yellow metal continues to trade below the prior uptrend line taken from the low of the 10th of July, but it also trades above the short-term downside line drawn from the peak of the 8th of September. Having that in mind, we prefer to take the sidelines for now.
If the bulls are strong enough to take the reins near the 1300 (S1) support, then we may see them targeting once again the 1315 (R1) resistance hurdle. A break above that level may open the way for the crossroads of the 1333 (R2) resistance and the prior uptrend line taken from the low of the 10th of July. On the other hand, a dip back below 1300 (S1) could initially aim for the 1290 (S2) line, where another break would confirm a forthcoming lower low on the 4-hour chart and could shift the short-term picture negative.
Zooming out to the daily chart, the fact that the price is currently trading above 1300 (S1) keeps the medium-term outlook cautiously positive. That psychological hurdle acted as the upper bound of the wide sideways range that contained the price action from the 31st of January until the 28th of August. A possible dip back below that obstacle will bring the price back within the aforementioned range and may be a trigger for further declines.