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Gold: Support or Pressure from Emerging Markets and Trade War?

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Has gold lost its safe-haven appeal?

Gold (GLD) has largely lost its safe-haven appeal in 2018. Usually, during economic and geopolitical worries, a risk-off sentiment takes hold, which favors gold. This year is different. While trade tensions and the emerging market crisis is raging, gold is finding few buyers. That’s happening mostly because the US dollar is attracting all the safe-haven bids. As the US dollar rises, dollar-denominated assets, including gold, become expensive for holders of other currencies, thus eroding its appeal.

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The fifth consecutive monthly decline

In August, gold prices saw a fifth consecutive monthly decline, which is the longest streak in the last five and a half years. Prices fell 1.3% in August and 7.8% so far this year. The rising US dollar (UUP) (USDU) and the bull run in US equities (SPY) (QQQ) were the major drivers behind gold’s recent poor run.

Factors impacting gold

The Federal Reserve is set to raise interest rates for the third time this year in September. Higher interest rates might also be weighing on investors’ minds, dulling gold’s appeal. As interest rates (TLT) rise, gold’s appeal declines with regard to income-generating assets since it doesn’t return any interest or income.

In the next parts of this series, we’ll look at some key factors that could impact the outlook for gold prices in the short to medium term, starting with the most important factor, the US dollar.

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