The Week Ahead in Gold
Stock markets have taken an ugly turn for the worse on Monday as risk aversion takes hold. Increasing worries over the U.S./China trade war, unrest in Hong Kong and concerns over Brexit are all playing a role in a major sell-off that has seen stocks trade lower by over 2 percent in early action.
Last week’s announcement by President Trump that he would add another 10 percent tariff on an additional $300 billion of Chinese goods is the latest action taken by the administration as ongoing trade talks appear to be largely fruitless. That decision has now been met with further action from China, however, as the nation has allowed its currency to take a drastic slide. The yuan recently traded at just over 7.08 against the dollar in offshore markets, and Monday marked the first time the yuan traded over the 7 per-dollar rate in over a decade. In addition to allowing its currency to fall, China has also reportedly directed state-owned companies not to purchase U.S. agricultural products.
President Trump accused China of currency manipulation, and the ongoing trade war could turn into a full-blown currency war. China’s recent actions suggest that they are comfortable allowing the yuan to slide even further, and both nations appear ready and willing to take increasingly drastic measures. With little progress being made in ongoing trade negotiations, the situation may get a lot worse before it gets better.
The heightened trade tensions come as markets are already battling several key issues. Last week’s interest rate cut from the Federal Reserve did little to appease stock market bulls. Although expectations for a 50-basis point cut had dwindled to almost zero, markets were looking for more dovish guidance from Fed Chief Jerome Powell. The Fed did not deliver such guidance, however, and left markets in a state of confusion. Powell’s remarks have led some to conclude that the central bank may not be as aggressive in its easing plans as previously thought, despite ongoing political pressure to lower rates.
Recent developments in the war on trade could potentially force the Fed’s hand, however. If China allows its currency to weaken further, the U.S. could be forced to cut rates and weaken the dollar. The greenback is already trading moderately lower today and could come under further pressure if markets begin to price in further easing by the Fed. A sinking dollar and declining yields could be a major catalyst for sharply higher gold, which could already stand to benefit from falling equities and rising risk aversion.
Strong fundamentals and a bullish technical posture have already fueled a significant rise in gold that could see the metal challenge previous all-time highs in the months ahead. The metal has broken above previous resistance to carve out a fresh 6-year high, and with little overhead chart resistance going forward, it could see a swift and significant rise towards $2000 per-ounce or higher. The market is now in a strong uptrend, and any significant dips may be met with aggressive buying.