Wednesday, 27 September 2017

When Pyongyang rings, don’t just look at safe-havens

Posted by Valentine at 10:23 Labels:

We have broken into a new stage in the Korean crisis. That’s right. We are now on the verge of an actual war between the international community, led by the United States, and North Korea.

But how did this happen? North Korean Foreign Minister mentioned three magic words on Monday: Declaration Of War. And I know what you are thinking…

A tweet from President Donald Trump cannot be interpreted as a serious declaration of war, but the “North Korea won’t be around much longer” part was not taken with a smile by Kim Jong Un.

Which sort of consequences are we now facing? Unknown really. And that’s creating a lot of speculation, rumors, uncertainty and of course, this situation is playing great for safe-haven assets. Gold rallied on Monday as NK’s top diplomat said his nation could target US bombers.

And with all these going on… investors start to wonder about risk aversion. How markets react when North Korea threatens to blow up the United States? And why? Understanding how risk aversion actually works could turn you into a smart investors, making profits when others don’t.

The risk-profit relation

A higher risk translates into higher profits. The equation is pretty simple. The more you are willing to risk, the higher interest you will probably get. Of course, you will also be exposed to a greater chance of losing your capital, but hey… that’s how things works.

Defining “risk aversion”

Risk aversion can be understood as a reaction of people's preference for certainty over uncertainty and for staying away of situations that might expose them to bad conditions.

Most retail investors will react the same way to a war threat. Fearing for themselves, their families and their savings. In that line, we can expect a jump on the safe-haven demand, including gold, the Japanese yen, the Swiss franc and (sometimes even) the euro.

But those are not the only assets that might benefit in periods of high uncertainty. If we are talking about a hurricane, think about how much money would be needed to rebuild affected areas? Think of machinery, construction companies and technology involves in that process.

If we are following up with the North Korean conflict. What about army suppliers? What about metallurgical factories? Food? Do you see the point? There are alternatives out there to make an upward turn even when the world seems to be falling apart. You just have to find them.

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