Heightened global trade tensions are pumping volatility into financial markets, but there is still not enough fear to drive gold prices materially higher, according to some analysts.
Falling equity markets are helping gold prices end last week in positive territory, but the market remains trapped in a channel, unable to break critical resistance levels above $1,290 an ounce. June gold futures last traded at $1,288.70, up 0.5% from last Friday.
Gold's lackluster performance during a week that saw equity markets drop more than 3.5% is not inspiring a lot of investor confidence in the near term, according to some analysts.
Bill Baruch, president of Blue Line Futures, said that he expects gold prices to struggle as this is traditionally a slow season for the precious metal. He added that despite all the market uncertainty, investors continue to bet on equity markets.
"Many people see the weakness in equities as a healthy correction," he said. "The S&P is only 3% from its all-time highs. There still isn't a lot of fear in the marketplace that would really give gold prices higher."
Baruch said that he is neutral on gold in the near term as there is "solid ground" supporting prices. He added that he would expect gold prices to rally after the summer lull.
Trade Wars Not Driving Gold Prices
Gold's disappointing performance comes as markets digest the news that the U.S. government has increased the tariff to 25% on $200 billion of Chinese imports.
Adam Button, managing director of Forexlive.com, said that one of the reasons there is not a lot of fear of the higher tariffs is because they don't actually take effect for a few more week.
"A lot can happen between now and June and one tweet can change the sentiment around trade," he said.
Button said that investors will have to see weaker economic growth as a result of the tariffs before they seek safe-haven assets like gold.
Jonathan Butcher, principal economist at Wood Mackenzie, warned in a research note Friday that the new tariffs could have a significant impact on global growth.
"The tariffs introduced in 2018 had a clear and negative impact. There was a lag before the effects were realized, but China trade data showed a fall in volumes from the end of 2018 much greater than normally occurs at that time of year. This was not limited to China-US trade; there were clear spill-overs to other economies," he said.
"We estimate that the negative impact of Friday's tariff increase could be even greater. The 10% tariff of 2018 was not fully passed on to U.S. consumers – importers have absorbed some of the costs through margin compression. A tariff of 25% is much harder to ignore, and will cause more displacement and disruption to trade flows."
The WoodMac economist said that escalating trade wars could drag economic growth to 2.3% to 2.4%, down from current growth forecasts of 2.6%.
U.S. Economy Remains Beacon Of Growth
David Madden, market analyst at CMC Markets, said that even in the face of a growing trade war, the gold market still suffers from the relative strength of the U.S. economy.
He added that even if the U.S. economy weakens, other major economies like Europe are expected to weaken at a greater pace.
"Even if the Fed does turn dovish, it would only be a matter of time before other central banks turn even more dovish and that continues to support the U.S. dollar," he said. "When gold can't surge higher when equities drop 400 points, that kind of tells you that the market doesn’t want to go higher."
Madden said that in the current environment, gold prices could eventually push to $1,300 an ounce, but he added that he doesn't see it going materially higher.
Button agreed that for many investors, the current economic worries are not strong enough to push gold higher.
He added that investors need to see a substantial drop in global economic growth that would prompt central banks around the world to loosen monetary policy.
Expected Rate Hikes Continue To Support Gold Prices
Although some analyst are not expecting gold prices to surge higher any time soon, the bearish case for the yellow metal is also not very strong.
Many analysts have said that rising volatility and the expectation that the Federal Reserve will cut interest rates by the end of the year continue to provide support for the yellow metal.
Bernard Dahdah, precious metals analyst at Natixis, said in a report Thursday that he thinks gold prices are current trading at their lows for the year. He added that prices should start to rise in the second half of 2019.
"We expect that the Fed will cut rates in December of this year. This will reduce the opportunity cost of holding gold and make the metal attractive. Moreover, the rate cut should put further pressure on the dollar, which will also suffer on the back of a widening budget deficit and slower growth," he said.
The bank kept its current gold forecast for the year unchanged, seeing the yellow metal averaging $1,330 an ounce, rising to $1,380 in the fourth quarter.
Ole Hansen, head of commodity strategy at Saxo Bank, said that he also remain optimistic on gold and thinks it's only a matter of time before prices break resistance above $1,292 an ounce. However, he added that it gold needs to see renewed interest from the paper market to make sustainable long-term gains.
"Despite gold's dismal performance last week, I believe it will eventually break above $1,292 to challenge the April high," he said.
The Final Say
With little major economic data to chew on, analysts have said that investors and traders will watch the news headlines for further insight into the trade negotiations between China and the U.S.
One of the economic reports that will garner attention next week will be Wednesday release of April retail sales. Markets will also receive housing construction data Thursday.
Source: Kitco News