Gold Price Drivers: The Fed, Trade War Fears, the US Dollar

Market uncertainty and gold

Uncertainty or volatility in the markets is increasing. The markets are adjusting for the high volatility phase after a prolonged period of low volatility across markets. The most recent issue fueling volatility is the fear of a trade war. The Trump administration announced tariffs on $60 billion of imports from China. China is planning $3 billion in retaliatory tariffs. The United States’ other trade partners might also mull over retaliatory tariffs. This kind of trade scenario doesn’t bode well for either the economic outlook or the US dollar.

Gold Price Drivers: The Fed, Trade War Fears, the US Dollar

In this risk-off environment, investors are shunning risk assets such as equities and turning to safe-haven assets such as gold and the Japanese yen. After Trump slapped China with more tariffs on March 22, the Dow Jones plunged 2.9% while the S&P 500 (SPX)(SPY) dropped 2.5%. Gold, on the other hand, gained 1.5%.

The Fed’s decision and gold

Previously, the Fed decided to increase interest rates by 0.25%, which was already priced into gold prices. Its guidance of two more rate hikes this year is also in line with its previous outlook. After January’s inflation data, some market participants started expecting the Fed to raise the forecast to three more hikes this year. As a result, the market considered the Fed’s decision to be less hawkish than expected. The US dollar weakened further, and gold prices gained as a result.

Gold and miners

Year-to-date (or YTD) as of March 22, gold prices have risen 2.0%. Among the precious metal stocks, only Harmony Gold (HMY), Coeur Mining (CDE), Goldcorp (GG), and Newmont Mining (NEM) have recorded positive returns. These stocks rose 25.1%, 4.7%, 3.9%, and 0.2%, respectively.

Gold’s outlook for 2018

The price outlook for precious metals is expected to depend on a host of factors, some of which are currently in gold’s favor while others aren’t.

In this series, we’ll look at these factors—including inflation, the US dollar, interest rates, trade war fears, and the equity market’s outlook—to assess gold’s outlook for the rest of the year.