Return of volatility
On March 23, 2018, gold futures hit a two-year high. Gold spot prices also rose 3.3% in the week ended March 23—the largest weekly gain since April 2016. The most recent spike in gold prices came after President Trump announced that the US government is considering import tariffs on $60.0 billion in imports from China. China also warned of $3.0 billion in retaliatory tariffs.
These developments create the perfect storm for the initiation of a trade war, which could be detrimental to the economic growth of both countries. Moreover, this event would also be negative for the US dollar. However, all these drivers are positive for gold prices.
Uncertainty to increase?
These events have also triggered higher volatility in the markets, creating buying opportunities in safe-haven assets such as precious metals and yen. After a prolonged phase of low volatility, the markets are now preparing for higher uncertainty.
While the markets calmed after Trump’s tweet hinting at less aggressive tariffs, the uncertainty is far from over. The CBOE Volatility Index (VIX) is in backwardation. The March contracts are more expensive than the April and May contracts, implying that investors are wary of volatility returning sooner rather than later.
Volatility and gold
If volatility continues creeping higher, gold investors might be in for a prolonged phase of increasing prices. Increasing economic uncertainty could lead to further appreciation in gold prices, which would benefit miners leveraged to gold prices. These miners include Randgold Resources (GOLD), Harmony Gold (HMY), Eldorado Gold (EGO), and Alacer Gold (ASR). These stocks constitute 10.5% of the VanEck Vectors Gold Miners ETF (GDX).