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Why Does Wells Fargo See a Downside in Gold Prices?

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Jun. 27 2019, Updated 2:38 p.m. ET

A dull period for gold

As we highlighted in Wells Fargo Says Investors Should Look for Alternatives to Gold, Wells Fargo (WFC) mentioned in May that gold no longer looks attractive based on the way the precious metal has been behaving in response to recent economic events. Since gold didn’t move much despite an escalation in trade tensions, WFC commented that it was a dull period for the metal.

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Wells Fargo sees a downside to gold

As reported by Kitco News, Wells Fargo’s head of real asset strategy, John LaForge, said in a note before gold prices (GLD) hit $1,400 per ounce that gold could hit $1,400 per ounce soon, but he still warned investors against buying the metal. He believes that the downside for gold is much higher than the upside. He added, “It wouldn’t shock us to see gold make a quick run at $1,400 first, before it starts heading lower, toward $1,200.”

US-China tensions should eventually be resolved

Part of LaForge’s prediction has already happened. After the Fed’s dovish pivot, gold prices surpassed $1,400 per ounce. The Wells Fargo strategist believes that the short-term direction of gold prices will be controlled by US-China trade tensions, which he eventually sees being resolved. LaForge, therefore, believes that any short-term gains or losses in gold are only temporary.

LaForge has also outlined a scenario in which a deal between the US and China isn’t reached. In that situation, he believes that gold stands to benefit. The escalation of US-China tensions has been one of the major drivers of gold’s recent run.

The initial impetus for the renewed tensions was provided by a tweet made by President Donald Trump on May 5, which revived the issue in a big way. Since then, the SPDR Gold Shares ETF (GLD), the biggest gold-backed ETF, has gained 11.2% as of June 25, while the VanEck Vectors Gold Miners ETF (GDX) has amplified that gain by returning 26.3% as of the same date. In comparison, the S&P 500 Index (SPY) and the NASDAQ Composite Index (QQQ) have fallen 1.1% and 3.2%, respectively.

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