As far as the trade war between the U.S. and China is concerned, we’ve seen the move by the Trump administration and the retaliation by China. Both moves were already on the table so no surprises there. One factor that could really get gold bulls talking would be if China slaps a duty on U.S. oil. This move would take the trade war to a new level of seriousness.
Gold traders are trying to claw back some of Friday’s $29.80 loss early Monday. This move suggests that much of the steep plunge was fueled by sell-stops rather than aggressive short-selling. The headlines read on Friday that long investors just bailed out of positions. This may be true, but one can also blame the placement of weak stops.
If you strip out the headlines and the speculative events like a potential trade war between the United States and China, one has to conclude that the surprise surge in the U.S. Dollar was likely behind the selling pressure. Let’s face it, there weren’t a lot of analysts calling for the steep break in the Euro that took place on Thursday and Friday after the European Central Bank’s monetary policy decision. And this was the move that set in motion the rally by the U.S. Dollar.
The dollar was also supported by a jump in U.S. Treasury yields in reaction to the Fed’s hawkish monetary policy statement. Gold becomes less attractive when rates rise because it pays neither interest nor a dividend and it becomes more expensive to foreigners because it is a dollar-denominated asset.
Early Monday, the headlines are saying once again that gold is up because of concerns over a trade dispute between the two largest world economies, the United States and China. The same news services made the same call early Friday.
Rather than read the headlines to determine if investors are concerned about a trade war, I think it’s better to watch for safe haven buying in Treasury instruments and the Japanese Yen. If U.S. Treasurys are rising as well as the Yen then I think it’s safe to say that the buying in gold today is tied to flight to safety buying. I also think that one should consider using gold as a lagging indicator of safe haven demand rather than a leading indicator.
As far as the trade war between the U.S. and China is concerned, we’ve seen the move by the Trump administration and the retaliation by China. Both moves were already on the table so no surprises there.
As long as the two parties are still negotiations then there should be no real concerns for investors. If the current negotiations end abruptly then this will be a problem and gold could pick up a bid. If either the U.S. or China announce more tariffs then this could also drive buyers into gold. I think it’s going to be an escalation of the trade war that could actually produce a bullish tone in gold.
One factor that could really get gold bulls talking would be if China slaps a duty on U.S. oil. This move would take the trade war to a new level of seriousness.