Gold Soft as Trade Tensions Escalate!
According to ABC Bullion, it’s been a difficult two weeks for precious metal bulls, with gold failing to hold support at the all important USD $1,300oz level late last week, before plunging to USD $1,275oz on June 15th.
The plunge, which took place about a day and a half after the Federal Reserve had gone ahead with a fully anticipated rate hike, erased any 2018 gains precious metal investors had been sitting on for the year, with both gold and silver now down in USD terms year to date.
Over just a few trading hours, some $30bn of gold sales were processed, a huge uptick in volume that drove the fall seen last Friday. The decline has continued over the past few trading days, with gold now trading at USD $1,270oz, whilst silver is at USD $16.45oz, having dropped nearly USD $1 at one point over the last week.
Softness in precious metal prices has unsurprisingly sparked an air of caution amongst gold traders and analysts, with a Bloomberg survey of 16 forecasters evenly split between bulls (5), bears (5) and those that are neutral (6).
From our perspective, whilst the sharp sell off last Friday was unwelcome, it’s still too early to say definitively that this as any more than a correction within a broader uptrend.
As per the chart below, which my colleague at JohnFeeney10 tweeted yesterday, which shows the USD gold price from 2015 to June 2018, gold still looks healthy enough, with a series of higher lows evident since the 2015 cyclical bear market bottom.
Make no mistake, the last few months choppy trading, and gold’s persistent inability to break above USD $1,360oz (despite 3 or more attempts), are negatives, but we expect meaningful support to come into play if gold approaches USD $1,240oz.
The key in the short-term is the USD, with the greenback ‘on-fire’ over the past few months, as you can see on the chart below. That is a substantial move higher in just 3 months, and explains nearly all of the USD gold price weakness we’ve seen in the same time period.
The reasons for that USD strength are multifaceted, with the elevated tensions around trade wars between the United States and China a definite factor. Trump has of course stated he’ll be looking to hit USD $50bn of Chinese imports with a 25% tariff, which got a swift tit for tat reply from Beijing
The other factor behind the USD rally, and subsequent gold weakness is the Euro, which has been clobbered against the USD for most of this year.
Whilst the ECB has now stated that it plans to end its QE program by the end of this year, it has also suggested that they plan to keep rates pegged at just 0.25% for another year. That was a catalyst for Euro weakness, and a further rally in the USD. For as long as that continues, gold will struggle, though in AUD terms, and indeed priced in many other currencies, the outlook is substantially healthier.
It’s also worth pointing out that whilst all the short-term chatter regarding trade wars is USD positive, in the long-run it will be even better for gold as it portends a period of slower growth, and higher inflation, all other things being equal.
This view was recently shared by the team at Capital Economics, who in a research note stated that; “rising trade tensions would benefit the price of gold”, and that gold should also benefit from the rising inflationary pressure that is building in the United States.
The idea that a trade war will support gold in time will gain more traction should volatility build in equity markets too. At the time of writing, the Dow has fallen for 8 straight sessions, and is approaching important resistance. Should it break through that, then ‘safe haven’ buying of gold will likely follow.
There are other supportive factors for the market too, with ETF holdings broadly stable despite last week’s sell off, whilst central bank gold acquisitions continue, with Russia again adding to its reserves!
Bottom line is that whilst the recent sell off was unwelcome for precious metal bulls, the outlook is still broadly positive, we are quite close to key support levels, and coming toward the end of a seasonally weak period for the yellow metal, with Q3 returns historically amongst the strongest.
As such, gradual accumulation of bullion is still the most sensible approach for medium to long-term investors.
