Rising U.S.-China Trade War Tensions Weighing On Gold For Now - Saxo Bank
Tuesday, the U.S. government announced that it would raise tariff to 25% on $16 billion worth of good from China. China quickly followed suit and Wednesday also raised tariffs to 25% on $16 billion worth of U.S. imports.
The gold market quickly saw all of its session gains erased following the latest trade rhetoric and is now negative on the day as investors move back into the safety of the U.S. dollar. December gold futures last traded $1,216.70 an ounce, down 0.13% on the day.
Ole Hansen, head of commodity strategy at Saxo Bank said that it is not surprising to see gold down on the trade news. He added that in the near-term increased tariffs will put more pressure on the yuan, which will continue to push the U.S. dollar higher and weigh on gold.
In the near-term gold prices could fall to critical support around $1,180 an ounce, he said. However, he added that he is not ready to throw in the towel on the yellow metal just yet.
While the market still hasn’t bottomed, he said that he sees some positive signs for gold.
“Short-term the trade war will be bad for gold, but the longer this goes on, the more the U.S. economy is at risk,” he said. “A weaker U.S. economy will weigh on the U.S. dollar and give gold the opportunity it needs to shine.”
Aside from trade wars, Hansen said that momentum in the U.S. dollar appears to be waning.
“There is going to be a limit to U.S. dollar strength because it will start to weigh on growth,” he said. “The U.S. government still has to deal with its growing debt and with their record bond issuances.”
Although Hansen does see some prospects for gold later in the year, he added that a lot of work has to be done before all of the negative sentiment in the marketplace is erased.
He added that the first level traders need to watch is $1,235 an ounce as this is critical initial resistance. Ultimately, he said that prices need to get back to $1,300 to attract significant investment capital.
“Gold can push to $1,265 an ounce and it could still be viewed as a weak correction in a major downtrend,” he said. “But if we get above $1,235 we will see some bears start to sweat.”
Because of gold’s historic short-positioning, the market could see a powerful short-squeeze if once the precious metal’s fortuned have turned, he said.
For investors looking for investment opportunities, Hansen said that he likes the idea of buying December $1,250 call options. He added that these are far enough out of the money to provide value for investors and it might not take much to push prices above this level by the end of the year.