Last Monday, however, gold prices suffered a bout of fever after the US–China trade conflict flared up, with both countries increasing tariffs against each other. President Trump announced his decision to increase tariffs from 10% to 25% on USD 200 bn worth of Chinese goods upon which Beijing retaliated by imposing a 25% tariff on about 5,700 products or about USD 60 bn worth of US goods, starting on 1 June.
Although gold’s role as a hedge against geopolitical turmoil has not been very reliable in the recent past, the metal’s sharp but short-lived rise was also partly fuelled by new tensions in the Middle East where Iran-backed Yemeni rebels attacked Saudi oil tankers and oil facilities, and Iran announced its intention to resume nuclear activity.
On the next day (Tuesday), gold prices quickly steadied after Trump backed down, calling the trade war “a little squabble” and resuming talks with China. Meanwhile, however, President Trump also urged the Fed to “match” China, which has been easing its fiscal policy and increasing its monetary stimulus, in order to offset the economic problems that could potentially be caused by new rounds of tariffs. The market is even pricing in one interest rate cut for 2019, which should continue to support demand for gold.
We believe that ongoing political and economic pressures will prompt the two sides at least to sow the seeds of an agreement, most likely by the G20 meeting that will be held in Osaka on 28 and 29 June. A resolution of the trade dispute, or at least an acceptable arrangement, would help China, which needs to prop up its economic growth in time for the 70th anniversary of its 1949 Revolution. It would also benefit Donald Trump, who will soon begin campaigning for re-election and is running out of levers to strengthen the economy (more tax cuts are unlikely).
Even though the price rise did not really rekindle interest in gold among investors, with ETF exposure barely increasing, some governments, on the other hand, continued to accumulate gold. China, for example, has been buying it since the beginning of the year in order to diversify its assets away from the US dollar. This should continue to mildly support the gold price.
While we continue to believe that the accommodative global monetary regime and the relatively easy current fiscal policy should lend support to the gold price, we expect that a resolution of the US–China trade dispute will be detrimental to gold by lifting one of the main uncertainties of the past year.