It definitely did not act as a safe haven, as it usually should in times of political and economic uncertainty, as the current protectionist measures are being overshadowed by concerns about rising rates around the world since the global economic growth momentum, though moderating, is still on the rise.
Gold has also been kept in check by the easing geopolitical tension now that President Trump and Kim Jong-un have signed an agreement for complete denuclearisation of North Korea.
Coming back to economics, most data suggests that the US economy is still firing on all cylinders on the back of a tight labour market (unemployment recently fell to its lowest level since 2000) and of the Trump tax reform and fiscal stimulus. Core personal consumption expenditures, the Fed’s preferred inflation measure, has risen to the 2% target for the first time in six years, suggesting the possibility of more than one interest rate hike this year. The Fed Funds futures are now pricing in a 75% chance of a hike in September and another in December.
All these positive statistics, coupled with the ECB signalling that European interest rates will be on hold for longer than expected, has sent the US dollar soaring to an 11-month high, giving gold no chance. Another boost to the dollar has come from Brexit uncertainties following David Davis and Boris Johnson departure from Theresa May government. The gold price actually plunged to its lowest level since December 2017 at USD 1237.
Another factor weighing on gold is that physical demand has slowed markedly. Reduced demand from China, the world’s largest gold consumer, is due to the devaluation of the Chinese yuan in response to the country’s trade stand-off with the US, as well as to disappointing Chinese data raising fears of a slowdown.
Gold has also been affected by ETF outflows. SPDR Gold ETF holdings of gold are now at their lowest level since August 2017, showing investors’ total lack of interest in the metal.
We believe gold could continue its downward trend if a trade agreement is reached before the conflict escalates into a bigger and more damaging dispute; we know that President Trump has a history of taking extreme positions and then moving towards negotiations, so he could agree to a last-minute compromise. We are therefore maintaining our prudent outlook on gold, believing that in the coming months it will probably remain range-bound between USD 1200 and USD 1300.
However, we do not believe that gold should be entirely dismissed: bullion may get a boost from a technical rebound as Asian bargain hunters could emerge once they feel gold has reached a solid bottom.
Also, strangely enough, despite the strong US macro data and the dollar’s recent surge, US bond yields have been dropping, maybe in anticipation of the Fed increasing rates less aggressively than expected if the trade war turns out nastier than anticipated, and this could put an end to gold’s decline.