Conflict Over Kashmir Risks Nuclear Winter, But Gold Goes Down

Many important things happened yesterday. Cohen testified before the Congress, the US-North Korea Summit took place, while tensions between India and Pakistan escalated. Will these developments boost gold?

India and Pakistan Engage in Another Conflict over Kashmir

India and Pakistan are once again squaring off over the disputed region of Kashmir. It began with the suicide attack in Indian-administered Kashmir, which killed more than 40 people. As the Pakistan-based militant group Jaish-e-Mohammed claimed responsibility for the bombing, India retaliated and launched airstrikes inside Pakistan, the first aerial attacks across the Line of Control dividing both countries since 1971. The results of these strikes are not confirmed. However, we know that two Indian jets were shot down and Pakistan army captured one pilot.

The conflict is serious. These countries are archrivals, which fought four wars since independence from Britain and colonial India partition in 1947. One detail is important here: both countries have nuclear weapons, so each conflict is potentially very risky. The nuclear war between India and Pakistan would be disastrous not only for these countries but for the whole world. According to some analyses, the spread of ash after a nuclear war would cover the entire earth, plunging temperatures to below ice age conditions. However, this is not good news for gold. The nuclear winter would destroy civilization – with 90 percent of population starved, we doubt whether the gold market would prevail and whether it would matter at all.

Anyway, the renewed tensions have caught the markets off guard this week. However, the reaction has been muted so far. Investors assume that the two nuclear powers are just posturing, and would be unlikely to escalate the conflict much further. If these bets turns out overly optimistic, we could see a short-term rise in the safe-haven demand for gold. But we would not count on something more, as geopolitical issues are not able to cause anything but limited and short-lived reaction in the gold market. Just look at the chart below – as one can see, the price of gold actually declined yesterday!

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