Investing

Time to buy gold and other safe havens after North Korea's nuclear test, history shows

Key Points
  • North Korea's most recent nuclear test was at least six times more powerful than anything the rogue state had done previously.
  • Hedge fund analytics took Kensho reveals what happened to financial markets following the last five North Korea nuclear tests.
  • Gold, utility stocks and the VIX were notable outperformers in the week after a North Korea test, according to Kensho.

The days after a North Korean nuclear test are a time to buy shares of stable assets like utility stocks and gold, while selling Japanese, Korean and Taiwanese shares, history shows.

Defense experts estimate the rogue regime's test Sunday had an explosive yield of more than 100 kilotons. To put it in perspective, that would mean the explosion was at least six times more powerful than North Korea's previous test in September of last year, which military analysts put at around 15 kilotons.

North Korea's relentless and escalating pursuit of nuclear weapons gives this week's financial markets a theme of "risk-off" protection, where investors perceive risk as high and tend to gravitate toward investments considered safer. History validates that stance.

CNBC, using hedge fund analytics tool Kensho, looked at what happened to financial markets after the last five times North Korea conducted a nuclear weapons test, beginning with its first test in 2006. As the recent test ranks as by far the most powerful, during one of the most tense times in the continuing conflict, impressions on global markets could be as much, if not more, than in previous years.

First, here's what happened to major U.S. financial markets in the week after a North Korea nuclear test, according to Kensho.

While Treasurys may be a common sense safe haven during times of geopolitical uncertainty, Kensho found a consistent decline after previous nuclear tests. Gold, however, was a consistent outperformer.

The yellow metal was already on its way to a big weekly move, with futures jumping on Tuesday by 0.9 percent to nearly their highest in a year.

And the CBOE Volatility Index tends to surge, history shows.

Next, let's look at a broader scan of what moved the most to the downside among global market assets in the wake of a test.

Avoiding the reverberations after a North Korean nuclear test is as simple as avoiding several Asian markets in close proximity, as well as European stocks. Exchange-traded funds tied to Japanese, South Korean and Taiwanese stocks consistently declined in the five-day aftermath of a test.

And finally, scanning a broader set of assets and exchange-traded funds reveals these winners in the week after a North Korea test.

Kensho calculates that among what works after a nuclear test are the iPath S&P 500 VIX Short Term and SPDR Utilities Select Sector exchange-traded funds, that saw bumps of more than 3 percent and 1 percent, respectively.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.