Thursday, September 26, 2019

Markets rebound thanks to renewed trade war optimism; what next for gold prices?

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: Indices rise, but sterling falls amid more Brexit chaos

Wednesday was a good day for the markets, with major indices rising after US president Donald Trump claimed a trade deal with China could happen sooner than people think. The DJIA rose 0.61%, the S&P 500 advanced 0.62%, while the Nasdaq Composite added 1.05%.

US data on new home sales for August also beat predictions, with a final figure of US$0.71m (high than the expected US$0.66m) and the numbers suggest lower borrowing rates may have helped lift the housing market. Elsewhere, the Dollar Index surged as recent political and economic risks surrounding Trump and the trade war seemed to soften, closing 0.73% higher on Wednesday.

Sterling tumbled against the dollar yesterday after a feisty session in the UK’s House of Commons, as UK prime minister Boris Johnson taunted rivals, telling them to call a general election by bringing a vote of no confidence against his government, in a bid to break the Brexit stalemate. Sterling fell 0.78% against the dollar to 1.235’s level.

Safe haven assets also took a tumble, as geopolitical risk appears to have subsided regarding the US China trade war. Gold fell to 1505’s level while USD/JPY surged back to 107.7’s level. US Treasuries also sank, with 10-year yields rising 9bps to 1.737%.

Today’s Analysis: Will there be a correction in gold prices?

It’s been a turbulent year for safe haven assets, thanks to rising geopolitical risk and mixed economic data. Gold prices in particular have hit new highs in 2019, advancing US$250 or 19.56% so far. Gold peaked in 2011 at roughly US$1,821 as a result of the US debt crisis in the US, and after it constantly soared following the global financial crisis of 2008. At its current rate, gold is set to reach those same levels as well. The Dollar Index has increased this year by 3%, which suggests the precious metal is not rising as a result of a weakened dollar, but because of demand for low risk assets.

Gold prices year to date

The rise in gold prices can be attributed to two factors: geopolitical and economic risk. Recent geopolitical risks include the US-China trade dispute, Brexit uncertainty and the recent drone attacks on a Saudi Arabian oil production facility.

Recent political news and how it has impacted gold prices

Economically, China’s slowdown is the most prominent, with GDP growth starting to show signs it could shrink below 6%. US data has also been mixed, as the trade war has weighed heavily on business outlook and consumer sentiment, causing uncertainty. This in effect delays businesses investing into new or high risk projects, while consumers spend less. 

When analysing gold prices for the year, a head and shoulders pattern can be seen forming, suggesting that a bullish to bearish trend reversal may be imminent.

Head and shoulders pattern forming on gold price chart

As gold prices are already extremely high due to long-term geopolitical uncertainty, it suggests worst-case scenarios have been priced into the market. That means gold isn’t likely to hit new highs as a result of escalating trade war tensions or Brexit woes. Instead, it is more likely to react strongly to negative economic data, which hints at the impact current geopolitical risks are having on the global economy. 

We expect a correction in gold prices, and it to trade back to within the 1450 to 1480 range. Future price movements will depend on economic data and new geopolitical risks instead of ongoing politcal risk. We also expect economic data to start to deteriorate as a result of the ongoing trade war dispute, which will likely keep gold prices pointing up in the short to medium-term, possibly rising past 1500’s level. But don’t expect it to head above the six-year high’s level of 1555.