The North Korea Crisis: “Have Cash. Have Gold. Have Velveeta."
After North Korea fired a missile over Japan last week, Jim Cramer, the host of CNBC’s Mad Money, recommended, “Have cash. Have gold. Have Velveeta.” Cramer ruminated about how NOKO’s nuclear threats against the United States are truly unprecedented. And this was before Sunday when Pyongyang tested a hydrogen bomb eight times more powerful than the atomic bomb dropped on Hiroshima during WWII.
We’ve been in a nuclear standoff before but not one as dangerous as this one.
After the failed Bay of Pigs invasion (a CIA-backed attempt to overthrow Fidel Castro), Soviet Premier Nikita Khrushchev reached a secret deal with the Cuban dictator to place Soviet nuclear missiles in Cuba to deter future invasion plots. Soviet medium- and intermediate-range ballistic missiles were sitting just 90 miles off the coast of Florida. In response, the United States imposed a naval blockade to prevent Russian ships believed to be carrying more missiles from reaching the island nation. In late October of 1962, President Kennedy authorized “stop-or-be-sunk” orders backed by a ring of U.S. warships, aircraft bombers, and surface-to-air rockets and missiles. The 13-day standoff known as the Cuban Missile Crisis was underway.
Kennedy demanded that any Soviet nuclear and/or offensive weapons already in Cuba be dismantled, along with the complete destruction of nuclear launch sites. After harsh words, U.S. Air Command going DEFCON 2, the shooting down of an America reconnaissance jet over Cuba, and an imminent attack by the United States, Russia agreed to remove the missiles under supervision of the U.N. In exchange, the U.S. promised not to invade Cuba and agreed to some back-channel deals for the removal of American missiles in Turkey and Italy.
The seriousness of this crisis is perhaps best summarized in Castro’s own words. In a letter dated October 27, 1962, the Cuban dictator wrote to the Soviet leader:
“I believe that the imperialists' aggressiveness makes them extremely dangerous, and that if they manage to carry out an invasion of Cuba — a brutal act in violation of universal and moral law — then that would be the moment to eliminate this danger forever, in an act of the most legitimate self-defense. However harsh and terrible the solution, there would be no other."
The Cuban Missile Crisis triggered a massive demand for gold. London gold prices moved above the United States Treasury’s official selling price. Gold volume trading increased five-fold, and thousands of tons of gold left central bank reserves for the private sector, resulting in a $50 million gold loss within the U.S. Treasury alone. American gold reserves were already dropping and ultimately plummeted from 20,000 tons in the 1950s to just 9,000 tons by 1970. In the 10 years following the Cuban Missile Crisis, gold prices surged 80%, rising from around $35/oz. in 1962 to almost $64/oz. in 1972.
Many are drawing direct parallels between the Cuban Missile Crisis and the current North Korean threat. We are indeed in another nuclear standoff. Another rogue nation is threatening our homeland with missiles. Both conflicts seem to have come without any forewarning, and Cuba and North Korea are both propped up by formidable global powers.
The North Korean crisis, however, is far more complicated.
Cramer points out that back in 1962, “The Russians backed down…because they did care about wiping out their country.” He added, “Now we have a regime that seems to be asking to be wiped out.” U.S. ambassador to the U.N. Nikki Halley echoed a similar sentiment in an emergency meeting of the U.N. Security Council yesterday by stating that North Korea is “begging for war.” U.S. Defense Secretary James Mattis perhaps defined the tone of that potential war by stating that the United States has “many military options” and would mount “a massive military response” if U.S. territory or allies were targeted. He added that North Korea risks “total annihilation.”
Unlike the Cuban Crisis of the 1960s, the North Korean situation seems impervious to diplomacy. Pyongyang has fired 21 missiles in 14 trial runs since February. They have also tested their most powerful nuclear bomb to date. They have sent rockets over Japan, threatened war with South Korea, and repeatedly put the U.S. mainland and Guam in their gun sights. Most recently, North Korean state media has warned of an attack on the U.S. electrical grid and just this morning threatened more “unexpected gift packages” for America.
“Enough is enough," Ambassador Haley declared yesterday. “We have taken an incremental approach, and despite the best of intentions, it has not worked.”
So as the specter of a potentially catastrophic war hangs over the world, the price of gold has surged to its highest levels in a year. Gold has gained more than 10% since mid July and shows no signs of turning back because the North Korean issue clearly has no easy solution. The situation appears utterly devoid of compromise, diplomacy, or back-channel deals. Pyongyang has stated unequivocally that it will never give up its nuclear weapons, which it perceives to be the key to its survival, and the world has stated in equally staunch terms that it’s unwilling to accept a nuclear-armed rogue state.
Unlike the Cuban regime some 55 years ago, North Korea has the fourth largest standing army in the world, along with countless missiles, stockpiles of chemical weapons, nuclear bombs, portable air defense systems, and batteries of anti-aircraft artillery. Many of their military facilities and armaments are hidden deep underground and protected by a system of elaborate tunnels that make it harder to attack. This also gives them direct access to South Korea, making Seoul susceptible to an invasion by unseen ground forces. In short, this current crisis is a quagmire of risk with critical repercussions for global markets and enormous ramifications for world peace.
It should come as no surprise that Cramer’s “North Korea–proof investment portfolio” includes cash, gold, and Velveeta: cash in the event it’s still worth something, gold in the event cash is worthless, and Velveeta in the event that one is resigned to eating emergency mac and cheese, the ultimate prepper ecstasy food, in a steel-reinforced fallout shelter.