Gold to Rise Even if Trade War Averted

Release Date:  Friday, May 10, 2019
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Trade War Jitters Send Gold Higher

President Trumps threatened tariffs against China and the prospect of a trade war sent investors to gold, a traditional safe haven asset to help end the week in positive territory.

"Gold futures gained Friday and for the week as President Donald Trump's increased tariffs on $200 billion in Chinese imports took effect, keeping up selling pressure on riskier global markets and benefitting haven precious metals...

"'Investors are buying into the safe haven as Trump's tariff increases cast a shadow over the future global economic outlook,' said Jasper Lawler, head of research for London Capital Group, while adding that a limited downside for U.S. stock futures seemed to indicate some market optimism around continued talks between the two economic superpowers. 'The global economy is in a fragile position as slowing global growth fears still linger ... This latest move by Trump could accelerate any downturn and investors want to be protected from this. We could see gold continue to advance back towards $1300 over the coming session....'" ("Gold extends upside run, heads for slim weekly gain as trade battle persists," MarketWatch, 5/10/19; emphasis added.)

On the equities side, the markets reacted with significant losses in early trading. "Stocks fell on Friday, extending this week's sell-off, after President Donald Trump said there's "absolutely no need to rush" on a trade agreement with China and tariffs will make the United States "much stronger."  The Dow Jones Industrial Average fell about 260 points Friday morning, while the S&P 500 fell 1.2% and Nasdaq was 1.5% lower. The decline followed a deep sell-off this week that saw the Dow falling more than 700 points and the S&P down nearly 3%...." ("Dow Down 250 Points After The US Slaps China With A Big Increase In Tariffs," CNBC, 5/10/19.)

Gold ended the week at $1,286.80/oz. Silver closed at $14.84/oz.

Gold to Rise Even if Trade War Averted - Kitco News

Kitco News reported that several analysts see higher gold prices even if the United States is able to avert a trade war with China due to a weakening global economy.

"As investors anxiously await the outcome of the U.S.-China trade talks, analysts are saying that trade war or not gold will remain in demand...

"With all this noise and uncertainty in the market, some analysts are advising to look past the trade tensions and focus on the U.S. economy. 'Irrespective of how trade negotiations eventually play out, we think that the Japanese yen and gold will make further ground in the rest of 2019, as the US economy slows sharply and the rest of the world remains weak," Capital Economics markets economist Simona Gambarini wrote in a note on Thursday...

"Risk-on assets, such as U.S. equities, are projected to decline throughout 2019 on slower global growth, according to Capital Economics. '"Risky" assets will continue to fall out of favour as a result of a slowdown in the global economy even if the U.S. and China ultimately reach some sort of agreement. As a result, we think that the rally in safe-haven assets has further to run...

Gold prices will also benefit from Federal Reserve's loose monetary policy moves this year, Capital Economics added. 'Since gold bears no interest, it tends to rise when Treasury yields fall, as we expect them to this year ... Our end-2019 forecasts for ... gold are ... $1,400/oz.'" ("More Sanctions, Tariffs? Trade War Or Not Investors To Flee Equities For Gold — Analysts, Kitco News, 5/9/19; emphasis added.)

Central Banks on Gold Buying Frenzy - TheStreet

TheStreet reported that world central banks are buying gold at a pace not seen since President Nixon took the United States off the gold standard in 1971.

"Central banks are going gaga over gold. They are snapping up the metal at the fastest rate in almost half a century in a trend that looks set to continue...

"'In all likelihood, we expect another strong year," says Alistair Hewitt, director of market intelligence at WGC in London. He notes that the volume of gold purchased by such institutions over the most recent four quarters was higher than for any calendar year since 1971. That was when President Richard Nixon pulled the U.S. off the gold standard monetary system at a time when gold was worth $35 a troy ounce...

"Central banks in emerging markets countries such as Russia are driving the push to buy more gold and diversify away from holding U.S. dollars...

"'This is part of a trend that began as long ago as 2010,' says George Milling-Stanley, head of gold strategy at Boston-based asset management company State Street Global Advisors... Milling-Stanley says that many countries in the developing world feel that they have far too many U.S. dollars in their reserves and they want to diversify by increasing their holdings of bullion. "'This buying is going to continue according to the emerging markets central banks that I talk to,' he says...

Better than just buying the metal, he says that these government banks aren't sensitive about prices. They will buy whether the price is high or low, at least once they've decided to accumulate more bullion for their country... If the demand for gold from central banks continues, that should be good for the gold market because it all but guarantees that a significant portion of the annual supply of the metal will get taken off the market each year... This year, central bank buying demand could be just as good if not better than it was in 2018.'By the look of the figures they could repeat that or even surpass it this year,' says Milling-Stanley. 'That is a very welcome development for the gold market as a whole.'" ("Why the World's Central Banks Are Going Gaga Over Gold.
TheStreet, 5/6/19; emphasis added.)

Gold is Liquid Portfolio Insurance - Degussa

European dealer Degussa Goldhandel GmbH issued its market report reviewing the central banks "crusade against risk" which, in fact, may create market instability. Degussa further discussed the importance of gold as portfolio insurance.

"Since the latest the crisis in 2008/2009, central banks around the world have been doing their best to expel risks from financial markets. By lowering interest rates, fixing them at extremely low levels, or issuing more credit and money, monetary policymakers make sure that ailing borrowers are kept afloat...

"Of course, there is nothing wrong with this development per se, were it not for the fact that the decline in risk perception does not come naturally, but has been orchestrated by central banks' many interventions in the credit and financial system. In particular, by artificially lowering market interest rates, central banks have triggered a "boom", which produces pretty-to-look-at official data (on GDP, investment, employment, and such), but which is, and unfortunately so, built on quicksand.

"The boom will only continue if and when market interest rates remain at suppressed levels, or are lowered even further. For if interest rates were to rise, many investment projects would turn out to be unprofitable; many loans would default; banks would run up losses and would have to rein in their credit supply; unemployment would rise; and so on. In other words: Higher interest rates would turn the boom into bust. This is why central banks are most likely to continue with their "crusade against risk"...

"[A] case for gold can be made as part of a portfolio's liquid means, because gold competes with the established (unbacked) currencies like US dollar, euro, Chinese renminbi and the like. However, the yellow metal has two significant advantages.

"First, the purchasing power of gold cannot be debased by central banks' monetary policies. Second, unlike bank deposits, gold does not carry default risk. Given current prices, we think that gold is relatively cheap, making it a fairly liquid portfolio insurance with (considerable) upside potential. In particular, in time there may be a good chance to sell gold at a high price and invest the proceeds in great assets trading at then-suppressed prices.1 This way, gold may even add to the portfolio's overall investment return.... (Degussa Market Report, 5/9/19.)

Gold "Very Attractive" in Current Economic Climate - Cheveley

George Cheveley, fund manager for Investec Asset Management, told the CNBC Squawk Box hosts that  gold has performed "amazingly well" considering the strength of the U.S. dollar. He also discusses the role of gold as a safe haven asset.

"One might argue that gold has performed amazingly well given the strength of the dollar. And in non-dollar currencies we've seen record gold prices.... We still see gold moving long term at around $1350 but in a major risk off event we see gold moving much higher even with a stronger dollar...

"Gold does works [as a safe haven]; one just needs to look at history to see that it works in most instances. In terms of yields, a lot of yields are negative right now so having no yield is better than a negative yield. So in that sense, gold is very attractive in the current environment." ("Gold is 'very attractive' in the current environment: Investor," CNBC, 5/8/19.)