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U.S. trade war tensions drive gold prices back to $1,700 - analysts

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(Kitco News) - Gold prices are staging a late-day rally Wednesday as tensions between the U.S. and China continue to escalate.

Comex June gold futures pushed back above a critical chart level of $1,700 an ounce after U.S. Secretary of State Michael Pompeo said that Hong Kong is no longer politically autonomous from China. June gold futures last traded at $1,711.10 an ounce, up 0.32% on the day.

“Hong Kong does not continue to warrant treatment under United States laws in the same manner as U.S. laws were applied to Hong Kong before July 1997,” Pompeo said in a statement. “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground.”

According to some analysts, the new stance on Hong Kong could have far-reaching consequences for the former British colony, including visa restrictions and even the threat of imposing tariffs.

“I think the potential for a new trade war with China could be a trigger for new gold buying,” said Bart Melek, head of commodity strategy at TD Securities.

Phillip Streible, chief market strategist at Blue Line Futures, said that escalating trade-war tensions will create some short-term volatility in the marketplace and help gold hold critical support.

“I think gold was an excellent buy below $1,700 an ounce because there are no many unknown factors driving market uncertainty,” he said.

While the latest move by the U.S. government is creating some buying momentum in gold, Streible said that there is not a big contest between the U.S. and China in a trade war.

“China is trying to flex its power but it really just doesn’t have much, not when compared to the U.S.,” he said.

Although trade tensions will add episodic volatility to markets, both Streible and Melek said that investors need to pay attention to the broader themes driving gold prices.

“The entire world is papering over its problems and will be good for gold,” Streible said.

Melek said that gold prices will continue to be caught in a tug-of-war between deflation and inflation.

Melek added that the global economy continues to face deflationary threats as the world adjusts to lower growth expectations as the COVID-19 pandemic has decimated the global economy.

He explained that deflation will push real interest rates higher, making gold less attractive. However, the key for gold will be how policymakers react to deflation.

“Governments and central banks have said that they will do whatever it takes to drive economic growth back to normal levels,” he said. “This reaction will drive inflation and push real yields back down and gold prices higher.”

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