Gold Is Watching Trade Tensions: Full-Blown War Or ‘Storm In A Teacup’?
(Kitco News) - After seeing a minor reprieve this week on slightly weaker U.S. dollar, the gold market’s main concerns are now the potential economic fallout from the escalating trade war rhetoric and the hawkishness of the Federal Reserve’s rate hike path.
“Uncertainty is the new normal,” RBC Capital Markets commodity strategist Christopher Louney told Kitco News on Friday.
For gold to really recover following last week’s major selloff, “actuality” of a trade war is required as opposed to just “risk,” Louney noted, explaining that markets turned their minds away from gold as a risk-off option while the U.S. dollar rallied.
“Gold struggled to rally on the back of risks like it has done in the past,” he said. “Now, [gold’s moves] depend more on the fallout of the trade war and less on whether there is one. But, the market is so far discounting what the actuality could be. If and when there is economic fallout, this is when you’ll see gold get the risk-off flows back. So far it hasn’t filtered through.”
Right now, the predominant view is that the trade war could end up being “some sort of storm in a teacup,” according to ING commodities strategist Oliver Nugent.
But, the trade tensions are starting to actualize, with the United States and China kicking off tit-for-tat tariffs on $34 billion worth of each other’s imports on Friday.
Escalating things further, U.S. President Donald Trump talked about tariffs on $500 billion of Chinese goods, which equals to last year’s annual total of all U.S. imports from China.
“What will matter is any talk around trade, whether there is any further retaliation or new tariffs imposed,” said Capital Economics analyst Simona Gambarini.
Some economists see further trade tensions negatively impacting economic forecasts, which is beneficial for gold prices.
“The risk of a further escalation is real. The U.S. is looking at more tariffs on Chinese goods, said to cover a flow worth USD 200 bn, and tariffs on imported cars. It is not possible to identify where the point will be reached when economists will have to lower their growth forecasts specifically because of imposed tariffs,” said ABN Amro chief economist Han de Jong.
U.S. Dollar In The ‘Driver’s Seat’
The greenback continues to be the central driver for gold prices next week after taming its rally on Friday. The U.S. dollar index was last at 94.04, down 0.44% on the day.
“The U.S. dollar still remains squarely in the driver seat. But, as the market refocuses on exactly what the Fed rate hikes will look like and how hawkish the Fed will really be, there could be [a change in perceptions],” Louney stated.
The U.S. dollar rally has been stealing gold’s safe-haven allure, as investors look towards the greenback for safety amid trade tensions, Nugent pointed out, highlighting that it is key to observe how a potential full-blown trade war could impact global growth.
“The unexpected trade war scenario would be positive for gold because it will stop the safe-haven flows into the U.S. dollar and revert them back to gold,” he said.
Nugent sees the U.S. dollar rally easing in the near-term, citing structurally bearish view and U.S. mid-term elections in November as headwinds.
SIA Wealth Management chief market strategist Colin Cieszynski also views the U.S. dollar rally as “running out of gas,” noting that there are no reasons for the greenback to go up or down.
“The U.S. dollar had a good run from April to June and is now settling into 93-95 range,” Cieszynski said. “In the spring you saw the ramp-up of trade tensions, and that got priced into the market. On the other hand of that, you’ve got the underlying economy that is strong and interest rates continue to rise towards 3%.”
What the market is seeing right now is gold bottoming after a major selloff and the U.S. dollar leveling off following a rally, according to Cieszynski.
Where Is Gold Headed?
Louney is cautiously optimistic on gold, adding that there is an upside risk in RBC’s forecast as gold could regain its footing.
“I’m not super bullish. Our annual average for 2018 is at $1,310 an ounce and for 2019 at $1,350 an ounce.”
The current $1,255 an ounce level is a great entry point for long-term gold investors, added Louney.
“We’ve seen gold bounce off its lowest levels since 2017 and now back to $1,250s. There’s a lot of psychological support levels residing in this range,” he said. “Below $1,250 we get a lot of buying support.”
Nugent described a positive outlook on future gold price direction, stating that he sees the precious metal gradually climbing up.
“If we can break and sustain above $1,260, then gold could hold above that level next week,” he said.
Capital Economics projects downside risks to gold prices, calling for $1,300 an ounce at year-end and citing the Fed’s monetary policy, which is still not supportive of gold.
“Gold could well come below our expectations if trade tensions continue to escalate and the dollar continues to upshoot,” Gambarini said. “We expect a modest recovery in prices.”
According to Cieszynski, who remains neutral on gold next week, the precious metal is settling into a range.
“It looks stuck in a $1,240-$1,260 maybe $1,265 trading range. Neither the imposition of tariffs nor stronger U.S. nonfarm payrolls and trade data were able to kick the U.S. Dollar and gold into gear. This suggests to me that these forces are offsetting each other, keeping gold stuck in its current trading range,” he said in an email to Kitco News.
Around 3 p.m. EDT, Comex August gold futures were slightly up from last week, trading at $1,256.10 an ounce.
The yellow metal largely ignored two main datasets this week — the U.S. job numbers released on Friday and the Federal Reserve minutes from the June 12-13 meeting published on Thursday.
Gold prices were still trading under pressure at the end of this week, but are managing to hold on to the $1,255 level after U.S. nonfarm payrolls report beat market expectations, with the U.S. economy adding 213,000 positions in June, while the unemployment rate climbed to 4% from 3.8%.
Strong jobs data does hint of a more hawkish Fed, as it proceeds with another two rate hikes this year, said economists at Capital Economics.
“A strong U.S. nonfarm payrolls number for June underpins our view that the Fed is likely to raise rates two more times this year but did not have a significant impact on commodity prices,” economists wrote on Friday.
Data To Watch
Key data to keep an eye on next week is the U.S. inflation and the PPI reports scheduled for release on Thursday and Wednesday respectively.
“Next week we have some inflation data and PPI data. That will be important because inflation is a key measure that the Fed is looking at. If we have strong inflation data, some traders might start to add more bets that the Fed will be as hawkish as the dot plot suggests,” TD Securities commodity strategist Ryan McKay told Kitco News.
Cieszynski also highlighted the Bank of Canada (BoC) rate decision on Wednesday, but noted that the announcement is not likely to impact gold prices in USD.