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Last week of August could rock gold prices as markets watch Trump's response to China

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Last week of August could rock the gold price as markets watch Trump’s response to China

(Kitco News) - The U.S.-China trade war is heating up and gold is shining bright with next week's events likely to offer more upside potential as gold heads further north of $1,500 an ounce.

After waiting for direction all week, the yellow metal finally made a move, surging nearly 2% on Friday, driven by the U.S.-China trade war comments, and a dovish-enough Federal Reserve. December Comex gold futures were last at $1,534.60, up 1.73% on the day.

A move towards $1,600 an ounce is looking more and more probable next week, according to some analysts.

"It looks like upside momentum is building and a breakout above that $1,540 [is possible]. If gold closes on the high and Trump has additional tweets over the weekend, we could really threaten a breakout above $1,540 on Sunday. At $1,540, anyone who got out will probably jump back in, anticipating another move up above $1,600," RJO Futures senior market strategist Phillip Streible told Kitco News on Friday.

The U.S. President Donald Trump unnerved the markets Friday with his tweets that promised to respond to China's retaliatory tariffs in the afternoon while heavily criticizing the Federal Reserve.

"We don't need China and, frankly, would be far better off without them … Our great American companies are hereby ordered to immediately start looking for an alternative to China … I will be responding to China's Tariffs this afternoon," Trump tweeted.

"As usual, the Fed did NOTHING! It is incredible that they can 'speak' without knowing or asking what I am doing, which will be announced shortly … My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?" another tweet read.

Analysts are carefully watching how this trade rhetoric escalates next week. "Trump tweeted that we don't need China altogether. It looks like additional tariffs will be implemented, stock markets should continue to sell-off. Safe-haven assets like the Swiss franc, bonds, gold, and silver should all benefit from that," Streible said.

Trump's response came after China announced retaliatory tariffs against $75 billion worth of U.S. goods, imposing additional tariffs of 5% or 10% on a total of 5,078 American products that will come into effect on September 1 and December 15.

Powell's comments and Fed's September meeting

Earlier in the day, the markets were digesting the highly anticipated Fed Chair Jerome Powell's speech at the Jackson Hole, which was relatively low-key. Powell stressed that the U.S. economy was in a "favorable place" and pledged that Fed will continue to "act as appropriate."

The chair's speech opened the door to a September rate cut while walking back expectations of a more aggressive easing, analysts said.

"Powell seems to have walked the line fairly decently. We saw the probability of 50-basis-point cut go from 40% to near zero today. Speakers before Powell did well to set the tone," said TD Securities commodities strategist Ryan McKay said.

For Powell, it was a balancing act of not promising too much and still acknowledging the market's concerns.

"Powell stuck with what he was saying at the last FOMC, where he signaled more mid-cycle adjust-type cuts. But, he also did enough to please the market in terms of recognizing that things have been 'eventful' since the last meeting and that Hong Kong, Brexit, growth concerns, and trade remain a worry and the Fed may need to be flexible enough to act appropriately," McKay added.

Market participants felt some relief that Powell was more dovish than some of the other Fed members, noted Capital Economics senior commodities economist Ross Strachan.

"There is no clarity around what will happen at the next Fed meeting. We are expecting a cut and it seems likely that it is still going to happen," Strachan said. "Gold's move after the September Fed decision will depend on communication that accompanies it."

There is still significant potential for markets to be disappointed come September and for gold to fall, he said.

The precious metal can remain above $1,500 an ounce, but some headwinds are coming in, especially when it comes to weak Asia demand, Strachan added.

"Increasingly got a stronger headwind of weak Asian demand from both India and China. In order to maintain prices and go higher, there needs to be strong continued interest from Western investors. Given the global macro uncertainty, that could continue to be the case," he said. "But, in the short-term, we saw very dramatic fall in bond yields and there is clearly scope for some of that move to unwind and that could put some downward pressure on gold."

The ECB and the U.S. dollar

Aside from all the Fed talk, ECB's minutes from the July meeting showed that the central bank will be unveiling a hefty easing policy in September, which could have a significant impact on gold as well.

"A 'bazooka' of monetary stimulus from the ECB is set to push EU yields deeper into negative territory. After all, playing hot-potato with negatively yielding European debt isn't particularly risky, when you can unload your potatoes on your friendly central banker," TD Securities strategists said.

In this environment, U.S. yields are also looking to head lower, they added "U.S. yields would eventually return on their downward trajectory, suggesting that gold's luster would once again reappear," they stated.

There is also an interesting relationship between the U.S. dollar and gold worth paying attention to, explained Blue Line Futures president Bill Baruch.

"My biggest takeaway here is that the dollar index is still above 98 and gold is at 1523. That says a lot. Imagine what gold can do if the dollar index fails at this ceiling level," he said.

What to watch next week

Aside from the all the trade jitters, data will be one of the main drivers for gold next week with the focus largely set on the U.S. GDP and PCE numbers, analysts said.

"There is a lot of data next week, which will be the next major driver for gold," McKay said. "All eyes will be how the data evolves heading into the next FOMC meeting. GDP and PCE numbers next week will be key."

The GDP data for Q2 is scheduled to be released on Thursday while the PCE figures are due out Friday. Some other key U.S. releases include durable goods, consumer confidence, and housing data.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.