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Gold Wins With No End In Sight To U.S-China Trade War - Bank of America

Kitco News

(Kitco News) - Gold could be one of the big winners as the trade war between the U.S. and China continues to escalate with no end in sight, according to one American bank.

Analysts at Bank of America Merrill Lynch reiterated their call that gold prices could push through $1,400 an ounce this year as geopolitical and trade uncertainty weighs on global economic growth.

Although the U.S. economy is faring better compared to Chin in the trade war, the analysts noted that the more prolonged it becomes, the bigger the toll it will take. At the start of the month, BoAML downgraded its U.S. growth forecast for the year; the bank expects to see gross domestic product ease 2.4% this year, down from the previous forecast of 2.5%; for next year the bank sees GDP growth of 1.5%, down sharply from the prior estimate of 1.8%.

This is the second downgrade the bank has made on the U.S. economy; the analysts noting that trade tensions are expected to get worse before they get better.

"Beyond a certain point, tariffs do reduce welfare in the large, open economy imposing them," the analysts said. "The year-on-year U.S. tariff increases are unprecedented and likely highly deflationary, creating major risks to the macro economy."

Growing U.S. tariffs on imported Chinese goods could start to weigh on consumer demand. The analysts noted that average tariffs on all imported goods have risen to 4.4%, the highest since 1973; the bank warned that a full-blown trade war could raise the average tariff on all imported goods to 13.8%, the highest since 1949.

The analysts added that with Congress now gridlocked, they are not expecting government fiscal policies to provide support for a weakening economy.

"So the onus is on the Fed to do what it can and we now expect it will. Our economists just revised their Fed expectations to a rate cut in September, another cut in December and a final cut in early 2020," the analysts said. This means a total of 75bps cuts in the Federal funds rate by early 2020.

In the current environment, the analysts said that low-risk assets, like gold and U.S. Treasuries, perform well. The comment comes as gold prices hold on to most of their recent gains after seeing their best one-week performance in more than a year.
August gold futures last traded at $1,339.90 an ounce, up 0.65% on the day.

"Gold prices look likely to do well if the trade war escalates further. This is because weaker global growth should lead to another round of monetary policy stimulus. Also, the ongoing trade war could turn into a currency war, further boosting investor appetite for gold," the analysts said.

On the flip side, the analysts were bearish on industrial metals, which means silver, which has a significant industrial component, could continue to underperform compared to gold.

"China accounts for a disproportionate share of global industrial metals demand," the analysts said. "Whether we are looking at copper, aluminum, nickel, lead, or zinc, China's demand sits between 45% and 55% of the world's total. A continued economic slowdown in China would be very detrimental to the base metals sector through reduced demand but also through a potential depreciation in the CNY."

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