Thursday, January 31, 2019

The perfect setup for Gold to shine?

  • China
  • Dollar
  • Gold

2018 was not the best year for Gold as the precious metal weakened by almost 5% during what was a challenging year on all levels. First of all, the ongoing trade war between the United States and China has weighed heavily on prices, but also the recovery of the US Dollar supported by higher Treasury Yields, Fed rate hikes and concerns about the strength of the Chinese economy exposed the yellow metal to some serious challenges. However, with the start of the new year, a number of variables changed and the tide seems to have turned in favor of Gold.

US-China trade war, a ticking bomb

The US-China trade war is in full swing with the Trump administration speculated to increase the tariff rate on $200 billion worth of Chinese goods, raising the current 10% to 25% on the 1st of March. The new round of trade talks is set to take place this week and if there is no resolution in the coming 28 days, investors will more likely go on high alert. However, in our opinion, expecting a resolution in the near future would be a mistake: there are some 23 disputes against the US filed by China to the World Trade Organization and investors need to be well aware of this.

But this is not even the worst part. Already the US shocked everyone on Monday by filing criminal charges against China’s largest technology company, Huawei for bank fraud, IP theft, sanction violations and wire fraud. In addition to this, the US is also seeking the extradition of CFO Meng Wanzhou and all this is taking place just ahead of the scheduled meeting between the two sides. If the US and China do not resolve the situation, things are only going to get worse from here abd naturally safe havens like Gold will attract investors' attention.

Gold's biggest nemesis, the Dollar, to take a slap

As Wall Street anxiously awaits the Federal Reserve’s interest rate policy decision today, Gold remains unfazed. Instead, it’s confirming that the medium-term outlook for the yellow metal remains strong. Gold's price is being supported by lingering fears of a global slowdown as well as weakness in the US Dollar. With the U.S. federal government's shutdown now over, traders returned to the markets on Monday with one less uncertainty in their mind.

However, the US economy doesn’t look as robust as before at the beginning of this year, after a series of disappointing figures and a decline in Treasury Yields, which can potentially invert the yield curve and signal the beginning of a recession. With the Fed reconsidering the continuity of rate hikes, the greenback will lose more traction and we will see more pressure and further downside potential allowing the precious metal to shine even brighter at least in the medium term.

To sum things up, we expect some happy days ahead for the yellow metal's bulls as uncertainty continues to mount. The geopolitical tensions caused by the trade war alongside a weaker Dollar, are the perfect setup for a shining safe haven.