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How Will the US Dollar and Gold React amid Escalating Tensions?

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Gold’s odd behavior

For most of 2018, gold (GLD) has not been behaving as it ought to behave in a situation of escalating geopolitical and economic tensions. It’s usually considered a safe-haven asset—where investors take refuge in the event of uncertainty and risk.

However, gold has not been able to draw safe-haven bids in 2018 so far, as the strong US dollar (UUP) keeps weighing it down.

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Gold’s loss is the dollar’s gain

So far in 2018, the US dollar (USDU) has been receiving most of investors’ interest. In Could Trade Tensions Support the US Dollar Again? we discussed how the dollar makes a comeback after trade tensions seem to escalate. Investors seem to believe that the United States will be less affected by the trade war than other nations and has a higher chance of winning it. This sentiment fuels the demand for US Treasuries (TLT), which entails the buying of the dollar.

Year-to-date, gold prices have fallen 8.6% while the US Dollar Index has risen 4.8%. Yesterday was no different in terms of investor sentiments. As the news of the new round of trade tariffs hit the market, gold prices fell while the dollar rose. Gold is also weak for another reason: the expectation of the Federal Reserve’s upcoming rate hike. The Fed will meet on September 25–26 and is widely expected to raise interest rates by 25 basis points. Rising interest rates reduce gold’s appeal, as it doesn’t yield anything in terms of income.

Outlook for the dollar and gold

While in the short term, the dollar is expected to continue to gain at gold’s expense, the dollar’s long-term outlook depends on how the current trade dispute unfolds. The conflict could start hurting US businesses (DIA) and economic activity (SPY), which could impact the dollar, boosting gold’s demand.

You can read Why the Bottom for Gold Could Be Close for more on gold’s price outlook. You can also read Which Sectors Are Worried about Rising US-China Trade Tensions? for in-depth coverage of the trade developments between the two economies.

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