The Week Ahead in Gold
The gold market is trading solidly above the key $1500 level as ongoing concerns over global growth and rising geopolitical risks fuel safe haven buying. The ongoing U.S./China trade war and increasing unrest in Hong Kong are at the center of attention as the new week kicks off.
Over the weekend, protests again took place in Hong Kong and concerns have been mounting about police handling of those protests. The weekend reportedly saw some of the worst unrest yet in the more than two months of demonstrations thus far, and allegations of police brutality are only aggravating the situation further. The Hong Kong airport authority was forced to cancel more than 120 flights on Monday as thousands of demonstrators filled the arrival and departure halls, joining a sit-in at the terminal that began late last week.
The Hong Kong airport is one of the globe’s busiest, and the shutdown shows just how much of an impact the protestors can have on the nation’s ability to function. The ongoing conflict is ratcheting up the pressure on authorities, who are growing increasingly concerned that the unrest could tip the local economy into recession. Hong Kong is already dealing with the effects of the U.S./China trade war, and analysts now wonder how much longer mainland China will allow the unrest to continue before a major crackdown is seen.
The trade war also continues to be a major influence on global financial markets and is the main culprit behind the recent volatility expansion. The most recent escalation saw China allow the value of the yuan to trade at the lowest level in more than a decade. The trade war could quickly become a currency war, and it has now been suggested that trade talks planned for next month may not take place at all. This has investors wondering not so much about when a deal may be reached, but rather what may happen if talks collapse completely.
If no progress towards an agreement is made, further tariffs and possibly even currency interventions could be seen. The global economy will almost certainly fall into a significant recession. The Federal Reserve will do what it can to combat the slowdown but may find its efforts largely ineffective as it can only cut rates so much. The central bank could then be forced to implement fresh QE or other measures to stimulate the economy, and it could potentially take years for activity to return to pre-crisis levels.
The current environment of economic and geopolitical risks, negative yields, central bank easing, and rising market volatility could continue to be very supportive of higher gold prices. The market has quickly and decisively distanced itself from the $1450 breakout region and could potentially see another rapid run higher if tensions escalate further. Against the current economic and geopolitical backdrop, a run towards previous all-time highs near $2000 per-ounce is not only plausible but increasingly likely. In the meantime, the market may need to spend some time digesting recent gains before forging ahead. Any dips in price are likely to be shallow and may be aggressively bought.