Golds Safe Haven Status is Intact
The bullion has risen about 18% so far this year. The precious metal hit a six-year high this month as central banks globally eased their monetary policy to deal with the slowdown in growth triggered by the U.S.-China trade war.
The events of the past six months have supported a bull run in gold, which is considered a safe-haven asset during times of economic turbulence.
The U.S. and China trade dispute escalated, the European economy slowed, Brexit became ever messier and tension in the Middle East flared up after the attacks on the largest oil-producing nation, Saudi Arabia.
Let’s take a closer look at these series of events-
ECB– Faced with slow inflation and bleak growth, the ECB eased again, delivering a fresh stimulus package. Amid the continued shortfall of inflation, the ECB cut its deposit rate by 10 basis points from -0.40 to -0.50.
All these ECB actions mean that the fresh package is quite powerful. Draghi cut further the interest rates further below zero, and they will not be hiked until inflation not only converges but also stabilized at the target. The ECB also restarted its quantitative easing, making it open-ended. It means that the bank will keep on buying assets for months or even years.
The bold ECB’s decision should weaken the Euro against the Dollar, which would be negative for the gold prices in US terms.
Gold initially gained after dovish ECB’s monetary policy decisions. It corrected later – just to rise again.
But it indicates that the immediate impact of the ECB’s monetary policy meeting has been moderate.
SAUDI TENSION- The safe haven appeal of gold increased following news reports about retaliatory military action by a Saudi-led coalition in response to the drone attacks on Aramco’s oil facilities. The US threatened Iran with direct combat in case Saudi is targeted again.
An unnamed Saudi official, the Wall Street Journal reported , said that a full recovery of Saudi Arabia’s oil output will take longer than the kingdom had promised.
The official noted that the situation is not as rosy and as easy as it appears to be. These escalating tensions brought about a rally in gold prices.
US CHINA TRADE WAR– trade discussions held last week achieved a “good outcome,” although uncertainty over a trade deal remained, as Chinese officials on Friday unexpectedly cancelled planned visits to farms in Montana and Nebraska.
The cancellation pushed U.S. stocks lower on Friday, while Chinese stocks dropped more than 1% today.
A U.S.-China trade breakthrough seemed unlikely after President Donald Trump told reporters on Friday he was “not looking” for a partial deal and Chinese officials cancelled goodwill visits to U.S. farmers.
But both sides later published positive statements. The U.S. Trade Representative’s office described last week’s talks as “productive” and China’s Commerce Ministry called them “constructive.” October’s high-level talks remain on track.
INTEREST RATE- On Wednesday, the Federal Reserve announced a 0.25% rate cut which failed to move markets much as it was already priced in. On Sept. 18, the Fed acted again and lowered the borrowing cost by another quarter of a percentage point, to a range of 1.75% to 2%.
As a result, gold traded somewhat bearish on Thursday. The precious metal dropped last week as traders were disappointed with another modest rate cut delivered by the U.S. Federal Reserve. Some were hoping the Fed would make a half-point cut.
However, the precious metal was trading higher later as markets remained unclear on future rate cuts.
Although the Fed failed to sound too pessimistic about the outlook of the US economy in the near future, the Fed committee remained divided on the future outlook, which heightened uncertainty and further gave a push to the yellow metal.
The Fed has two more policy meetings before the end of 2019, in October and December, but there is no certainty it will cut rates again.
Spot gold prices are expected to trade stronger for longer, possibly breaching $2,000 an ounce and posting new cyclical highs at some point in the next year or two
But the risks to this bullish scenario are equally strong. Both U.S. and China are back at the negotiation table in October and the markets are returning to normal on hopes of a resolution to their dispute.
On the economic front, the U.S. economy is still showing signs of strength, helped by robust consumer spending, and strong job creation. That was the main reason why the Fed failed to signal that more cuts were coming. FOMC officials are divided over whether more cuts will be needed, with some of them thinking Wednesday’s change was itself a cut too far.
That being said, gold’s haven status is intact and it can provide a great hedge when other assets are plunging. In the current uncertain economic environment, the precious metal offers a prudent way to diversify your risk and add some safety to your portfolio.