On Monday, the price of gold has briefly jumped above $1,300. For the
next two days, the yellow metal has been holding near that important
psychological level, although it failed to rally
subsequently. Let's take a look at the trigger(s) of the upward move.
The reaction of the gold market over the following days is pretty
telling...
China Strikes Back
It has been a hot week! Indeed, just look at the chart below. As you
can see, the price of the yellow metal leaped to $1,300 on Monday, even
surpassing briefly that key level. What happened exactly?
Chart 1: Gold prices from May 13 to May 15, 2019.
First of all, China has imposed new retaliatory tariffs on $60 billion worth of U.S. goods
in a response to the raise in tariffs from 10 to 25 percent on $200
billion worth Chinese goods levied by Trump on Friday. The Red Dragon
announced higher tariffs - they are going to raise them from 10 to 15
and 25 percent, depending on the product - on goods ranging from
liquefied natural gas to toothpaste. The Wall Street did not welcome the move: the S&P 500 Index
fell 2.4 percent, its worst day since early January, while the NASDAQ
dropped 3.4 percent, its greatest loss since early December 2018.
The risk-off sentiment triggered by the renewed trade war clearly helped gold, a safe-haven asset. Moreover, after the stock market turmoil, investors increased their bets that the Fed will have to cut the federal funds rate later this year. The market odds of such a move in 2019 rose to 75 percent from about 40 percent one month ago. Such dovish expectations made the bond yields to decline, as one can see in the chart below. Lower interest rates also supported the gold prices.
Chart 2: Yield on the US 10-year Treasuries from May 2, to May 15, 2019.
Retail Sales and Industrial Production Disappoint
Second, some key economic reports have been released this week, bringing a negative surprise to the markets.
They can't explain the gold prices' rise to $1,300, which happened
earlier, but they could support the yellow metal in hovering around that
level on Wednesday. We mean here, of course, the surprising decline of retail sales in April. The sales at U.S. retailers fell 0.2 percent last month,
marking the second decrease over the last three months. The drop is
disturbing as healthy labor market should translate into solid spending.
Moreover, industrial productionfell 0.5 in April. Both these reports suggest softer second-quarter growth rate. Indeed, the Atlanta Fed forecasts now that the US GDP
will increase 1.1 percent in the second quarter, compared to 1.6
percent rate expected before the April data on retail sales and
industrial production. Slower economic growth is better for the gold
prices than faster expansion, but it might be not enough to trigger a
genuine rally.
Implications for Gold
What does it all mean for the gold market? Well, the weaker than expected economic reports and elevated geopolitical uncertainty
(due not only to the trade wars, but also to the rising tensions
between the US and Iran) should support the gold prices. However, the gold's failure to rise more decisively is more than telling.
In part, it can result from Tuesday's more upbeat comments from
American and Chinese officials on striking a trade deal. But it might
also suggest that we have still a goldilocks economy, and that gold is
still not ready to rally. We could see short-term volatility, especially if tensions with Iran escalate into something bigger. But - given the lack of recessionary signals and the greenback's solid position - we do not yet see a fundamental game-changer for the gold market.
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Disclaimer: Please note that the aim of the above analysis is
to discuss the likely long-term impact of the featured phenomenon on the
price of gold and this analysis does not indicate (nor does it aim to
do so) whether gold is likely to move higher or lower in the short- or
medium term. In order to determine the latter, many additional factors
need to be considered (i.e. sentiment, chart patterns, cycles,
indicators, ratios, self-similar patterns and more) and we are taking
them into account (and discussing the short- and medium-term outlook) in
our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits' Gold News Monitor and Market Overview Editor
