The gold bulls may have their work cut out for them this week as fading risk aversion pressures the market. It has been widely reported that the U.S. and China are nearing an agreement on trade to put an end to the tariff war that has been going on for months. The effects of the trade war have already been seen in both countries and a resolution has the potential to fuel a significant rally in stocks.
Although there are numerous details that still need to be worked out, it has been reported that China may commit to purchasing large amounts of U.S. agricultural and energy products while also removing barriers making it easier for U.S. companies to operate in China. The U.S. for its part, is reportedly looking at removing tariffs on $200 billion in Chinese imports. It has been suggested that a formal agreement could be reached by the end of the month.
A U.S./China trade pact could be viewed as a major victory for U.S. President Donald Trump. The Trump administration has made the restoration of a fair and equitable global trade marketplace a cornerstone of its policy agenda, and a deal could come at a great time for the administration. Trump recently left Vietnam empty-handed following an unproductive meeting with North Korean leader Kim Jong-Un. The Trump administration is also dealing with numerous legal and investigative issues including last week’s testimony from former Trump attorney Michael Cohen.
In addition to higher equities, the gold market may also have to contend with a stronger dollar. The greenback is moving higher today on trade optimism and could potentially see further upside later in the week as the ECB meeting gets underway. The Eurozone continues to grapple with a weak economy and could potentially cut its economic forecast while also signaling to markets that an initial rate hike may be further down the road than previously anticipated.
Despite some of the current headwinds, however, the gold market still has a lot of fundamentals working in its favor. A poor European economic outlook, an ongoing slowdown in the U.S. and China and the end of U.S. monetary policy-tightening could keep the yellow metal on an upwards trajectory.
The larger picture is also bullish for gold. The aging equity bull market will, at some point, conclude and investors will be forced to seek out alternatives. The U.S. debt load also recently hit over $22 trillion, and the government has again reached its credit limit. Although lawmakers could vote to raise the debt ceiling, yet again, there continues to be no concrete plans in place for how the massive debt load will be addressed. In fact, the threat of additional government shutdowns is likely to become a major area of focus as the fiscal situation deteriorates further. While it may not take place this year, next year or even in the years ahead, the U.S. will eventually be forced to deal with its massive debt burden. Although it remains unclear how the government might address the issue, it could have significant ramifications for the dollar and a significant currency debasement cannot be ruled out as a possible solution.
Although the 3.5-month uptrend in gold has now been negated, the metal is not likely to fall too far before finding significant buying interest. For the patient, big-picture investor, the current dip may represent an excellent long-term value.