Gold Prices Consolidate After Nearing $1300/oz

Release Date:  Friday, May 17, 2019
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Gold Prices Consolidate After Nearing $1300/oz

Gold prices were significantly higher this week as the growing trade war with China sent investors to the yellow metal. However, Friday saw consolidation in prices despite some economic headwinds in our future.

"Gold futures slipped Friday and risked a finish in the red for the week, tracking a slightly firmer dollar and held back by generally upbeat run of recent U.S. economic data. Haven gold found little traction Friday even with stocks headed lower after China cast fresh doubt on the likelihood of a trade pact anytime soon. Also on the geopolitical stage, the chance for a hard Brexit, and any ensuing market volatility, grew in likelihood with inaction in the U.K. on Friday...

"As for the bigger picture, the Chinese government and state media sent a clear signal to markets Thursday and Friday that it is reluctant to resume trade talks with the U.S...." ("Gold lower, risks weekly loss, as relative dollar strength holds up," MarketWatch, 5/17/19.)

In related news, stocks fell in morning trading on Friday due to continued worry about the U.S.-China trade war. "Stocks fell on Friday as trade tensions between the U.S. and China continue to dominate investor sentiment. The Dow Jones Industrial Average dropped 204 points at the open while the S&P 500 declined 0.7%. The Nasdaq Composite lagged, sliding 0.9%...." ("Dow drops 200 points at the open as US-China trade tensions linger," CNBC, 5/17/19.)

Gold ended the week at $ 1,278.10/oz. Silver closed at $ 14.48/oz.

Tariffs May Cause New Recession, Send Gold Prices Higher - Morgan Stanley

Morgan Stanley is warning investors that the current tariffs by the United States and China could likely cause a new recession.

"The latest tit-for-tat tariffs on Chinese imports have already taken a wrecking ball to stocks' gains. Now, some analysts are bracing for the impact to trickle out to the broader economy. '[D]emand destruction and ailing confidence increase the potential impacts well beyond just higher costs and would likely lead to an economic recession in our view.'

"Late last week, the Trump administration raised the rate of tariffs on $200 billion worth of Chinese imports ... announced that further levies on another $300 billion in imports would be forthcoming... On Monday, Beijing retaliated by announcing plans to set a tariff rate as high as 25% on a portion of $60 billion worth of U.S.-made goods, effective June 1. The news sent contracts on the Dow down more than 500 points in pre-market trading...

"'There are many signs that the risk of a recession in the next 12 months is rising," Wilson said. He pointed to proprietary indicators Morgan Stanley's Cross Assets team tracks, which last month "officially tipped over into the 'downturn' phase which has always preceded an economic recession ... While an economic recession doesn't always ensue after the indicator signals downturn, on average equities tend to underperform treasuries over the next twelve months by about 6%, indicating we have little upside until either prices fall back to more reasonable levels or this indicator reverses,' Wilson said... ("Morgan Stanley warns tariffs could 'likely lead to an economic recession'," Yahoo! Finance, 5/13/19; emphasis added.)

In related news, Morgan Stanley sees higher gold prices as the dollar weakens and investors seek a safe haven asset as protection against a potential trade war with the European Union.

"Gold will be an attractive safe-haven asset as rising trade tensions weaken the U.S. economy and drag down the U.S. dollar, according to a recent report from Morgan Stanley. But it's not the current trade dispute with China that investors should be paying attention to; the banks said that a potential trade war with the European Union is the most significant risk to the economy.

"U.S. President Donald Trump has until May 18 to decide whether he will impose a 25% tariff on car imports from the European Union. The deadline comes 90 days after the U.S. Commerce Department said in a study that auto imports pose a threat to American national security... 'The eurozone's countermeasures may turn out to be more impactful compared to China's, which may help explain why last week's U.S. equity sell-off has especially affected companies with significant non-U.S. revenue streams,' the analysts at Morgan Stanley said in their report released earlier in the week.

The analysts added that a trade war with Europe could force the Federal Reserve to cut rates... 'This is why the USD does not benefit from trade tensions to the extent experienced in August/September last year,/ the analysts said.

The analysts said that a further inversion of the yield curve and growing investor pessimism will undermine the U.S. dollar, which in turn will push gold prices higher. 'We believe it is only a question of time before we see liquidity pushing gold prices higher and the USD lower,' the analysts said...." ("The Price Of Gold Will Rise As Trade Wars Weigh On USD - Morgan Stanley," Kitco News, 5/15/19.)

China May Resort to "Nuclear Option" Regarding US Bonds - CNBC

CNBC wrote that a desperate China may exercise a "nuclear option of selling its holding of US treasury bonds in retaliation against tariffs.

"Consider it China's nuclear option in the trade war with the U.S. - the ability to start dumping its massive pile of Treasury bonds that could trigger a surge in interest rates and substantially damage the American economy. As the two sides engage in a tit-for-tat tariff exchange, the possibility that China might raise the stakes and stop being the world's biggest consumer of U.S. debt again reared its imposing head Monday...

Should the Chinese decide to walk away or reduce their role in the market, that, at least in theory, could create a substantial dislocation for a country such as the U.S. that relies so much on sovereign entities to buy its paper...

"With the U.S. expected to be staring down $1 trillion annual budget deficits in the years to come, a less active Chinese government does generate some fears. 'To me, that is the biggest worry. This is really the biggest weapon they have,' said Sung Won Sohn, professor of economics at Loyola Marymount University and president of SS Economics. 'They need to do more to counter the United States. So if push comes to shove, that's what they are going to resort to...'

"Stocks endured their worst day of the year Monday as fears continued to boil that a resolution was not on the horizon. A failed China trade deal has been among the market's worst worries since President Donald Trump took office. A lack of a deal could threaten a U.S. economy that has been performing better than expected even as the rest of the world slows.  'If we look at how the market has performed year to date, obviously it's been up very strong, pricing in recovering growth," said Jason Draho, head of Americas asset allocation at UBS Global Wealth Management. "If escalating trade tensions slow global growth ... we may not get this recovery that the markets have been assuming.'" ("China's 'self-destructive nuclear option' in trade war: Selling US Treasury bonds,"  CNBC, 5/13/19; emphasis added.)

Gold Will Save Investors from Impending Global Economic Crisis - Sprott

Sprott CEO Peter Grosskopf told investors the current "Cinderella" economic story is coming to end, requiring a diversified portfolio that includes gold.

"The markets have delivered strong overall returns globally and those who have not been fully invested have been punished as asset classes of all descriptions rose in tandem, fueled by reasonably strong economies and low-interest rates...

"There are ominous signs that dangers lie ahead for this Cinderella story, which has worked for investors lately but will not last forever. For one thing, all of the strategies described above have become increasingly correlated and have benefited from once-in-a-lifetime interest rate reductions. For another, global debt levels are at record levels and can no longer be serviced by the productive engines of the economy and normal tax levels. Many pensions and entitlement programs are past the point of broken and government deficits are out of control...

"A reasonable question to ask is what happens if investors cool to Treasuries, or lose confidence in the purchasing power of their cash, or start to price in the multiple risks that appear to be lurking on the edges of "consensus" expectations? The crowded trade is to do nothing but that is yet another harbinger that the right thing to do is to begin to add some portfolio protection...

Most investors do not realize that gold is one of the world's most liquid currencies and assets, trading with volumes equivalent to those of the euro or U.S. Treasury bond benchmarks. Although similar in philosophy, gold blows Bitcoin away on any measure by which the two can be compared. Gold bullion is easy to purchase and the principal risks are timing, fees and expenses...

Put yourself in the headspace of a citizen of most countries and you can understand why gold is immediately superior to holding local currency-denominated cash at the bank, which is an almost guaranteed loser of principal value over time. All of this underpins the conclusion that gold is a must-own cash diversification tool that provides a defense against fiat currency devaluation. Gold should be held in the account of every investor at some appropriate percentage...

"Perhaps now is finally the time for investors to benefit from a "life preserver" while others enjoy the card game on the decks of the central bank-piloted Titanic." ("Why We Need Gold," Sprott Insights, 5/15/19.)

Billionaires Prepare for Next Bear Market with Gold - Visual Capitalist

The data-driven economic website Visual Capitalist discussed why savvy billionaires are preparing for the next economic downturn with gold.

"No one likes to lose money, even if you have billions to spare. It's why the prospect of a bear market - a prolonged downturn which sees stock prices fall by at least 20% over two months or more - is something that keeps even the world's most elite investors awake at night.

"To hedge against this concern, the world's billionaires use a variety of strategies and tactics to protect their wealth, including setting up their portfolios with specific asset allocations that can help soften any blow caused by an extended market downturn...

"Because market sentiment can change so quickly in the market, these elite investors protect themselves by having diverse portfolios that include uncorrelated assets... While this sounds complicated, uncorrelated assets are simply investments that don't move up or down in the same direction as the other asset classes in the portfolio. A small allocation to these uncorrelated items can help protect the value of a portfolio when market sentiment changes...

"What kind of asset classes can be used for this kind of purpose? While options like real estate, commodities, and cash can contribute to a more diversified portfolio beyond traditional stocks and bonds, many experts say that gold is the undisputed king of uncorrelated assets.

"The price of gold doesn't usually doesn't move with the wider stock market - and often, because of its history, the yellow metal can even increase in price during the course of a bear market.

"Here are some of the reasons billionaires turn towards an allocation in gold: Gold has acted as a store of value for thousands of years; Gold can lower the volatility of a portfolio; Gold can act as a hedge against inflation in some scenarios; Gold is a traditional safe haven asset that investors flock to when the market goes astray...." ("Animation: How Billionaires are Preparing for the Next Bear Market," Visual Capitalist, 5/16/19; emphasis added.)

ScotiaBank Explains why Central Banks Love Gold

In its Commodity Strategy Metals Update, ScotiaBank reviews the critical reasons why global Central Banks (CBs), especially those in so-called Emerging Markets (Ems) are buying gold.

"Its been a market known known that Central Banks have been accumulating Gold at an incremental solid pace beginning in 2018. The part worth flagging is that 2019s purchasing pace started off strong ... illustrating the continued strength in gold accumulation, with new & interesting purchases. That has not accidentally coincided with an acknowledgement of sobering growth rates, rate cuts and collective shift in dovish policies in an attempt to combat typical late cycle volatility and slower growth...

"Golds traditional attributes-a safe haven, reserve asset, fiat currency hedge, a geopolitical hedge, a $ hedge, and a diversification tool for portfolios-are well known... [there are] new recent macro drivers that may have induced

a shift in EM CB buying trends. Those include being a liquidity hedge (against swelling pool of negative yielding assets), and hedge against protectionism, geopolitics and a recession few CBs are 'prepared' for...

Gold becomes a hedge against growing protectionism and polarizing world politics that began with Brexit and US 2016 elections and the new buying trends could be a (delayed) reaction to these major past geopolitical events. If that's the thinking, 2018s volatile year with the emergence of renewed trade tensions could only fuel further diversification inflows as has been the case with Chinas timely notification if its purchases.

Gold buying could be a recession hedge especially as the Fed now has only half as many % points in its arsenal that it typically 'uses' in a downturn.

Gold prices, and also importantly Gold volatility, is relatively cheap vs bonds and stocks, and Decembers global stock rout warned of expected market stresses

Gold is arguably also an alternative to the expected general shortage of dollars globally (not a hedge to the $ which would arguably rise further IF the Fed returns to a tightening cycle). There is now officially more $100 bills in circulation than $1 and $20 notes, due to international demand as a hedge against economic instability/inflation, a global fear of negative interest rates (Japan, Europe), and demand from the underground economy. Cash ($) is king but only until a price, at which point alternatives come back into favor...

"Emerging Markets (who traditionally have a much smaller share of FX reserves in Gold) have been avid Gold purchasers , with the usual suspects like China, Turkey, India and Kazakhstan all continuing to accumulate the past months. However, new participants ... is generally a constructive development for Gold." ("Emerging Market CBs: cutting (rates) and buying (Gold)," ScotiaBank Commodities Strategy Metals Update, 3/13/19; original emphasis.)

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