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Can Donald Trump's tweets meaningfully alter gold prices?

Publication Date: 24 Jul 2018 - By Toni Ip-Stanbridge By Toni Ip-Stanbridge
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Macro Investment Strategies Commodity UK China MENA EU ex-UK Asia ex-China USA Metals and Mining

Spot gold experienced a steep correction just before the summer months and was last seen at $1224 per ounce. It broke past its support to find a new trading range, hitting its lowest level since January 2017. 

Compared to last year, a global trade war has now become a reality with both the US and China having exchanged $34bn of tariffs on each other’s goods. However, gold seemingly lost its appeal as a safe haven asset, as investors have focused more on the rally in US dollar. 

Indeed, the backdrop weighing on gold price has not changed and has in fact become louder as a driving force behind the price of gold bullions. Over the last several years gold price’s movements were more or less driven by the US Federal Reserve unwinding its accommodative policy, as the 3-year correlation between spot gold price and the US dollar came to -40%. 

The Fed has so far raised the interest rates twice this year. The central bank is expected is announce two more rate hikes this year, even though President Trump has expressed his frustration with the Fed's moves in undoing the work his administration has put into the economy. 

Trump's comments - delivered stingingly via Twitter - immediately sent gold to top $1232. However, the recovery was short lived as the market largely believed in the Fed’s independence. With the US economy now on a better footing and expected to grow at 4% in Q2 according to consensus estimates, this only supports the case for further interest rate increases for the rest of 2018.  

While the Fed would remain independent, Trump has said he is concerned about the weakness in the Chinese currency yuan. It is unlikely though Trump would turn his remarks into any potential actions. 

However, the ongoing trade war with China and various other countries could deter the Fed from normalising its policy, if the global trade conflict does eventually eat into US economic growth.

Having said that, it will take time to see the effects of these protective tariffs surface, as investors are currently guided more by the daily tweets of the American president and the developments surrounding the trade battle. 

Therefore, the yellow metal should remain under pressure going forward assuming the central bank sticks to its policy goals.

Any meaningful reversal in gold prices is unlikely until at least after Q3 if the exchange between the US and China does burgeon into a trade war of a bigger scale, prompting investors’ flight to safe haven. 

On the belief that global leaders will come to terms with one another at the eleventh hour to prevent the worst case scenario – a full blown trade war, gold will remain bearish in the near term although the seasonal demand for gold in Asia would offer moderate support in Q3.  

 

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