Gold prices are subdued this year with SPDR Gold Shares (GLD - Free Report) adding only 1.2% (as of May 13, 2019). Anticipation of a U.S.-China trade deal has strengthened risk-on investing and led to a market rally this year, which in turn has curbed the demand for safe-haven gold. Also, the greenback surged on an improving U.S. economy, which went against this commodity investing as it is priced in U.S. dollar.
Is Gold On the Verge of Breaking Out?
Hopes of a trade deal, which has bolstered the market so far, are now fading. Forget about a trade deal in 2019, the United States and China have in fact engaged into a bull-blown trade war in May (read: US-China Trade Tensions Re-Escalate: 7 Vulnerable ETF Areas).
As soon as the Trump administration hiked tariffs on $200 billion worth of Chinese goods from 10% to 25% on May 10, China announced on May 13 a retaliatory move – an increase in tariffs on $60 billion of American goods to 25% beginning Jun 1. Trump is also considering additional tariffs on an incremental $325 billion of Chinese imports.
Needless to say, the renewed spat has resulted in higher volatility, pushing up the volatility gauge iPath S&P 500 VIX ST Futures ETN VXX by about 15.1% on May 13. Risk-off sentiments have every reason to strengthen. So, safe-haven gold fund GLD added more than 1% on the day.
Per Bank of America, the S&P 500 may skid to 2,775, if the deal is postponed and slump to under 2,600 if there is no deal at all. In both situations, markets are going to remain rough and push up gold prices.
The IMF also cautioned about global growth tensions. The IMF expects the global economy to grow 3.3% in 2019, down from 3.6% in 2018, according to its latest World Economic Outlook report issued Apr 9. This marks the slowest expansion since 2016. Overall, 70% of the global economy is forecast to slow down this year. Trade tensions between the world’s two biggest economies, the United States and China, have increasingly weighed on business confidence. This is another reason to be bullish on gold prices.
A dovish Fed for 2019 is yet another tailwind.The Fed has not enacted any rate hike so far this year and remains patient for the future course too. Atlanta Fed President last week said the central bank might have to slash interest rates if consumer spending dips as a result of increased U.S. tariffs on some Chinese goods from May 10. Several central banks like the ECB and BoJ are still practicing negative interest rate policies.
Central banks’ gold buying is yet another strength for the metal. Some of these contributed to a 7% rise in global gold demand in the first quarter from a year earlier, according to the World Gold Council, published on Financial Times. Russia was the biggest buyer during the period, followed by China. “There’s been lots of purchases by emerging market central banks looking to diversify their US dollar exposure,” per the WGC. Inflows into ETFs backed by gold jumped 49%.
ETFs in Focus
Against this backdrop, investors can keep track of gold ETFs like SPDR Gold Trust (GLD - Free Report) , iShares Gold Trust (IAU - Free Report) , Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL - Free Report) , SPDR Gold MiniShares Trust (GLDM - Free Report) and GraniteShares Gold Trust (BAR - Free Report) (see all precious metals ETFs here).
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