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Trade Wars Not Building Enough Fear To Push Investors Into Gold - Analysts
Monday, 13 May 2019 13:54 WIB | GOLD CORNER |Gold OutlookGold Corner

Heightened global trade tensions are pumping volatility into financial markets, but there is still not enough fear to drive gold prices materially higher, according to some analysts.

Falling equity markets are helping gold prices end last week in positive territory, but the market remains trapped in a channel, unable to break critical resistance levels above $1,290 an ounce. June gold futures last traded at $1,288.70, up 0.5% from last Friday.

Gold's lackluster performance during a week that saw equity markets drop more than 3.5% is not inspiring a lot of investor confidence in the near term, according to some analysts.

Bill Baruch, president of Blue Line Futures, said that he expects gold prices to struggle as this is traditionally a slow season for the precious metal. He added that despite all the market uncertainty, investors continue to bet on equity markets.

"Many people see the weakness in equities as a healthy correction," he said. "The S&P is only 3% from its all-time highs. There still isn't a lot of fear in the marketplace that would really give gold prices higher."

Baruch said that he is neutral on gold in the near term as there is "solid ground" supporting prices. He added that he would expect gold prices to rally after the summer lull.

Trade Wars Not Driving Gold Prices

Gold's disappointing performance comes as markets digest the news that the U.S. government has increased the tariff to 25% on $200 billion of Chinese imports.

Adam Button, managing director of Forexlive.com, said that one of the reasons there is not a lot of fear of the higher tariffs is because they don't actually take effect for a few more week.

"A lot can happen between now and June and one tweet can change the sentiment around trade," he said.

Button said that investors will have to see weaker economic growth as a result of the tariffs before they seek safe-haven assets like gold.

Jonathan Butcher, principal economist at Wood Mackenzie, warned in a research note Friday that the new tariffs could have a significant impact on global growth.

"The tariffs introduced in 2018 had a clear and negative impact. There was a lag before the effects were realized, but China trade data showed a fall in volumes from the end of 2018 much greater than normally occurs at that time of year. This was not limited to China-US trade; there were clear spill-overs to other economies," he said.

"We estimate that the negative impact of Friday's tariff increase could be even greater. The 10% tariff of 2018 was not fully passed on to U.S. consumers “ importers have absorbed some of the costs through margin compression. A tariff of 25% is much harder to ignore, and will cause more displacement and disruption to trade flows."

The WoodMac economist said that escalating trade wars could drag economic growth to 2.3% to 2.4%, down from current growth forecasts of 2.6%.

U.S. Economy Remains Beacon Of Growth

David Madden, market analyst at CMC Markets, said that even in the face of a growing trade war, the gold market still suffers from the relative strength of the U.S. economy.

He added that even if the U.S. economy weakens, other major economies like Europe are expected to weaken at a greater pace.

"Even if the Fed does turn dovish, it would only be a matter of time before other central banks turn even more dovish and that continues to support the U.S. dollar," he said. "When gold can't surge higher when equities drop 400 points, that kind of tells you that the market doesn™t want to go higher."

Madden said that in the current environment, gold prices could eventually push to $1,300 an ounce, but he added that he doesn't see it going materially higher.

Button agreed that for many investors, the current economic worries are not strong enough to push gold higher.

He added that investors need to see a substantial drop in global economic growth that would prompt central banks around the world to loosen monetary policy.

Expected Rate Hikes Continue To Support Gold Prices

Although some analyst are not expecting gold prices to surge higher any time soon, the bearish case for the yellow metal is also not very strong.

Many analysts have said that rising volatility and the expectation that the Federal Reserve will cut interest rates by the end of the year continue to provide support for the yellow metal.

Bernard Dahdah, precious metals analyst at Natixis, said in a report Thursday that he thinks gold prices are current trading at their lows for the year. He added that prices should start to rise in the second half of 2019.

"We expect that the Fed will cut rates in December of this year. This will reduce the opportunity cost of holding gold and make the metal attractive. Moreover, the rate cut should put further pressure on the dollar, which will also suffer on the back of a widening budget deficit and slower growth," he said.

The bank kept its current gold forecast for the year unchanged, seeing the yellow metal averaging $1,330 an ounce, rising to $1,380 in the fourth quarter.

Ole Hansen, head of commodity strategy at Saxo Bank, said that he also remain optimistic on gold and thinks it's only a matter of time before prices break resistance above $1,292 an ounce. However, he added that it gold needs to see renewed interest from the paper market to make sustainable long-term gains.

"Despite gold's dismal performance last week, I believe it will eventually break above $1,292 to challenge the April high," he said.

The Final Say

With little major economic data to chew on, analysts have said that investors and traders will watch the news headlines for further insight into the trade negotiations between China and the U.S.

One of the economic reports that will garner attention next week will be Wednesday release of April retail sales. Markets will also receive housing construction data Thursday.

Source: Kitco News

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POPULAR NEWS
Stocks Close Down for Second Straight Session as Trade Concerns Persist

U.S. stocks closed lower Monday, with technology shares leading major benchmarks to their second straight losing session. The S&P 500 fell roughly 0.7% to end at 2,840, while the Dow Jones Industrial index shed 0.3% to about 25,679. The Nasdaq Composite index retreated 1.5% to approximately 7,702. Concerns over U.S.-China trade relations deepened after U.S. technology companies began complying with new export restrictions instituted last week by the Trump administration against China's...

Gold posts a modest rise after ending last week at a 2-week low

Gold prices finished Monday with a modest gain after settling at a two-week low in the previous session, with the dollar showing some weakness and U.S. stocks on the decline. June gold on Comex added $1.60, or 0.1%, to settle at $1,277.30 an ounce. It ended Friday at $1,275.70, the lowest most-active contract finish since May 2, according to FactSet data. Gold futures logged a weekly loss of 0.9% last week on the back of a jump in U.S. consumer sentiment and a slightly firmer buck. Among...

Gold Ends at Nearly 3-Week Low as Dollar, Stocks Perk Up

Gold futures ended lower Tuesday as global stocks staged a rebound and the dollar strengthened a bit, dulling bullion's appeal and sending prices to the lowest finish in almost three weeks. June gold on Comex lost $4.10, or 0.3%, to settle at $1,273.20 an ounce, after booking a modest rise on Monday. The yellow metal logged the lowest most-active contract settlement since May 2, and turned slightly lower week to date, according to FactSet data. Gold's recent gains had been supported by...

Gold Holds Weekly Drop as Dollar Steadies Amid Trade

Gold held a weekly loss as the dollar steadied and markets remained fragile after the escalation in the U.S.-China trade war. Spot gold -0.1% at $1,275.92/oz at 7:24am in London, after dropping 0.7% last week. Bloomberg Dollar Spot Index steady, after +0.8% last week. Chinese Foreign Minister Wang Yi told U.S. Secretary of State Mike Pompeo in a call on Saturday that while it™s still possible to work out a deal, Beijing must safeguard its interests....

Gold Claws Up From Two-Week Lows as Dollar, Stocks Point Lower

Gold futures prices inched up from the two-week lows hit to wrap up last week, with both the dollar and stocks pointing lower Monday. A narrow trading band continues to hamper significant moves for the haven metal, which typically might draw strong demand based on concern for a prolonged trade war that keeps risk markets, including stocks, in flux. Instead, gold futures prices logged a weekly loss of 0.9% last week on the back of a jump in U.S. consumer sentiment and a slightly firmer...

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