The precious metal is trying to test the bottom in the range of $1235- $1255 an ounce
Amid the expectations of Washington’s imposing new tariffs on China’s imports, oil tries to go ahead after the price fall in June, the worst result since Donald Trump was elected the president in 2016. The massive trade war will make the global economy more likely to decline, reduce the global risk appetite and increase the demand for safe-heaven assets. The matter is that investors don’t believe in the link between the trade battle between the USA and China and the greenback. Traditionally, the USD and the XAU/USD move in opposite directions, and so, gold bears succeed in the second quarter.
Dynamics of gold and dollar
Although gold performance in the first half-year has been the worst since 2013, its environment is not that negative. Dollar impressive spurt in April-June increases the risks of weak corporate governance in the US companies, which drive about 40% of yields from abroad. As a result, the chances for S&P 500 correction are rising, which should increase the demand for safe-heaven assets.
The precious metal is usually quite responsive to the changes in Treasury real yield. In addition, 10-year yield is not going up after the failed attempts to consolidate above the psychologically important level of 3%. Tariffs will result in higher import prices and inflation rate, which will reduce the Treasury real yield and support the XAU/USD bulls.
As for dollar, I don’t think its success will last forever. Yes, the US GDP growth will be up to over 4% in the second quarter, and the divergence with the Euro-area economic expansion rate will explain the EUR/USD drop. However, the market isn’t staying still. A decline in capital investments, according to CIBC World Markets, will result in GDP performance lower than that of 3% on a yearly basis, promised by Donald Trump. In addition, a gradual restoration of the currency block’s economy will encourage euro bulls to go ahead for a counter attack, immediately affecting the USD index.
I, personally, think that another important factor, sending gold sharply down in June, was that everybody was too optimistic about its probable surge after the Fed’s meeting. Previously, the hikes of the federal fund rates resulted in the victory of gold. This time, it failed; and speculators got rid of the useless asset, drawing the net worth close to the red zone. It didn’t stand there for long in late 2016.
Dynamics of gold speculative positions
I believe, investors overestimate the positive impact of trade wars on the US dollar. The conflict escalation will damage the Treasury yield, and so, limit the growth potential for the greenback. With the current rates of inflation and unemployment, according to the Taylor’s rule, the federal funds rate should be close to 4%, so nobody will criticize the Fed if it aggressively restricts its monetary policy. However, the central bank correctly assesses the recession risks and is willing to put up with the inflation, higher than the target. If the FOMC meeting’s minutes sounds dovish, it can provide a new momentum to XAU/USDbulls’ attacks.
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