Potential escalation in trade conflict supports gold price

Market report Michael Blumenroth – 31.05.2019

Weekly market report

As in the previous weeks, the trade conflict between the US and China continues to capture investors’ attention and is deepening the worry lines on investors’ foreheads.

In recent days, Chinese rhetoric has become increasingly sharp. The country’s more or less open threat to restrict or even altogether stop the export of rare earths to the US is garnering increasing attention. If followed through, a restriction would affect the US economy significantly.

Will the Fed cut interest rates?

Neither are the messages from the US conciliatory. Across the markets, fears are rising that the conflict may sooner or later impact the global economy. Increasing yields on government bonds mirror the perceived threat of recession. Market interest rates on US government bonds have fallen to their lowest level in two years. The yield curve is inverted to the extent that yields on two- or ten-year US treasuries are below the current key interest rate. Market participants therefore estimate the probability of the Fed lowering interest rates this year at around 90 per cent. Half a year ago, it was close to zero. Just this morning, yields on ten-year Bunds also fell to a record low of -0.2 per cent.

Gold benefits from situation

Low market interest rates usually boost the gold price. The same goes for the new tariffs Trump has threatened against Mexico. Last night, the US President announced import duties on all Mexican goods to force action against illegal immigration. The tariffs are to rise in stages until reaching 25 per cent by October.

This, of course, also supports the gold price. The rising US dollar exchange rate, on the other hand, is rather counterproductive, having increased slightly against the euro but significantly against gold-producing countries’ currencies such as South Africa and Australia.

US dollar and euro gold prices rise week-on-week

Gold traded at 1,275 US$/ounce on Thursday morning last week. On Thursday evening, the precious metal rose to 1,286 US$/ounce and after some back and forth moved more or less sideways until retreating to 1,275 US$/ounce on Thursday (yesterday) morning – which came as somewhat of a surprise in the current environment. Since yesterday afternoon, however, things have been moving steadily upward to the current level of 1,294 US$/ounce.

Xetra-Gold thus also rose in the course of the week, slightly supported by the somewhat weaker exchange rate of the euro against the US dollar. From 37.05 €/gram last Thursday and 37.10 €/gram on Thursday afternoon, Xetra-Gold retreated on Wednesday afternoon to its weekly low of 36.70 €/gram. In an environment of rising risk aversion, however, things have been looking up since yesterday and Xetra-Gold traded at 37.35 €/gram this morning.

Gold price continues to develop favourably amid tense geopolitical situation
The search for safe havens, which of course also extends to the Swiss franc, the Japanese yen and government bonds, could further support the gold price in the near future, at least until the US and China somehow untangle the Gordian knot of their trade conflict.

I wish all readers a relaxing early summer weekend.  

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