Gold Up 1% As Equities Drop 2% Across The Board On Trade Fears
(Kitco News) - Investors are caught in an escalating trade war and are once again turning to gold as a safe-haven asset, according to some analysts.
Last week, U.S. President Donald Trump increased tariffs on $200 billion in Chinese imported goods to 25%, up from 10%. He has also threatened further tariffs by June if a trade deal is not completed. In retaliation to the U.S. rhetoric, the Chinese government announced on Monday that it was going to raise tariffs on $60 billion in U.S. imported goods.
The new salvos in the ongoing trade war have spooked investors with U.S. equity markets down roughly 2% across the board. The Dow Jones Industrial Average is currently down more than 600 points on the day, last trading at 25,336 points.
At the same time, gold prices are up nearly 1% on the day and are testing resistance at $1,300 an ounce. June gold futures last traded at $1,299.60 an ounce.
Currency analysts at Brown Brothers Harriman said in a note said that the trade tensions between the U.S. and China could ultimately push the U.S. into a recession.
“Trade tensions should dictate the tone of global financial markets this week, and it won’t be pretty,” the analysts said.
In an emailed statement to Kitco News, Lukman Otunuga, research analyst at FXTM said that this environment will be positive for gold and it could be only a matter of time before the yellow metal pushes above $1,300 and test critical resistance at $1,310 an ounce.
“Safe-haven investments such as gold may shine through the market uncertainty as concerns mount over sizzling trade tensions between the two largest economies in the world, threatening global growth,” he said.
Colin Cieszynski, chief market strategist at SIA Wealth Management Inc., said that the latest rally in gold has helped the market snap out of its downward trend and momentum could push gold prices above $1,300 an ounce.
“The stars are aligning for gold,” he said. “We still need to push and hold above $1,300, but this rally looks promising,” he said.
Not only are trade tensions weighing on the U.S. dollar, which is positive for gold, Bill Baruch, president of Blue Line Futures said in a note to clients Monday that the yellow metal is building momentum as expectations for a rate cut continue to build.
The CMC FedWatch Tool shows that markets are pricing in a more than 70% chance of a rate cut by the end of the year. This is sharply higher compared to last week when markets were pricing in a 50% chance.
However, he also warned investors that gold still has much work to do to regain its bullish momentum.
“What matters most today is the close, and it must, must, must close above $1,295 at a bare minimum. Simply a close above $1,295 would not be that exciting given today’s rip, we want to see a close above $1,301.5 and anything less will keep us skeptical…” he said.
Cieszynski said that he is currently watching initial resistance at $1,304 and $1,308 in the near term.
“If gold can’t rally in this environment then the market has a very real problem,” he said.