Can the Fears of a Trade War Push the Price of Gold Up Further?
The prices of gold increased as fears over a massive trade war drove the value of the US dollar down and stimulated demand for safe haven assets. The threat to a looming trade war began when President Donald Trump decided to impose taxes on aluminum and steel imports. The taxes on both materials prevented the greenback from enjoying a seven-week high.
"The risk of trade wars, which could impact economic growth and raise uncertainty, plays into the hands of gold," said Ole Hansen, an analyst for Saxo Bank. Based on the FXCM gold price chart, the value of the precious metal went up by 0.5% to $1,322 per ounce around the time of the POTUS' decision. On the other hand, April’s gold futures went up by 1.4%, and settled at $18.20 per ounce.
Before investors learned of the potential trade war, spot gold prices were down without a bottom in sight. In March, gold was down by 0.4% on track of a weekly loss for the second time. It was down by $1,300 per ounce, which was the lowest rate since the first week of 2018. Gold prices were being affected by the foreseeable interest rates hike by the US Fed that would send USD prices higher. This year, Reuters claims that the US Fed may increase interest rates up to four times.
Higher interest rates have always affected the prices of the greenback positively. In 2015, anticipation of higher interest rates allowed the US dollar to strengthen significantly against other major currencies.
Gold has an inverse correlation with the USD so when the latter's prices go up, the former's value dips and vice versa. When interest rates are high, bond yields also go up, which means that investors will make less from investing commodities and opt for assets with higher returns.
Despite the interest rate hikes that are expected to happen in 2018, however, the risks of a trade war have overshadowed the financial markets. If a trade war pushes through for the long term, the US may experience an inflation, which would effectively push the prices of gold higher.
"Any escalation of trade wars will significantly dent the US dollar appeal, weigh negatively on US assets such as bond and equities and make gold the go-to hedge against rising US fiscal and political vulnerabilities," said OANDA Corporation’s Stephen Innes.
In Asia, some investors let go of dollar investments and bought yen and gold due to fears of a trade war. In addition, political uncertainty in Italy is also supporting gold prices. According to its recent performance, the precious metal was able to hold its moving average of $1,300 per ounce for 100 days, which is an important indicator for investors in keeping their gold investments.
Other precious metals are unaffected by talks of a trade war. Silver was still down by 0.10% at $16 per ounce, settling at a two-month low in March.