Gold Bucks Commodities’ Downtrend on Trade War Jitters


Aug. 5 2019, Published 3:59 p.m. ET

Gold prices plunged after the Fed’s rate cut

Gold prices fell after the Fed announced an interest rate cut of 25 basis points on July 31. While a rate cut is good news for gold and other safe-haven assets, the Fed chair’s tone regarding future cuts subdued investor sentiment for gold.

Because gold doesn’t yield anything in terms of regular income, lower interest rates make it more attractive than other interest-bearing assets. Moreover, the more hawkish-than-expected tone from the Fed lifted the US dollar, which further pressured gold prices. Usually, gold prices and the US dollar are inversely related, as gold is denominated in the dollar.

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Boost for gold prices after Trump escalated trade war

However, gold prices received a fresh boost in the form of the escalating trade tensions between the US and China. In a surprise move through a series of tweets, President Trump announced on August 1 that an additional 10% in tariffs would be levied on $300 billion of Chinese goods starting on September 1.

China has vowed to fight back against these tariffs. As reported by The Hindu on August 3, China’s spokesperson at the foreign ministry, Hua Chunying, said, “China does not accept any maximum pressure, threat or blackmail.”

China’s move to devalue yuan

China also allowed the yuan to fall to a record low today. The offshore Chinese yuan declined 2.1% this morning to 7.09 per US dollar (UUP), crossing the seven-per-dollar mark for the first time in over a decade.

This move by the Chinese central bank is seen by many as an effort to offset some of the negative impacts of additional tariffs that are coming its way. However, this move may only lead to infuriating Trump even further.

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Trump had previously stated that some countries, including China and Europe, are manipulating their currencies to strengthen their flagging economies. On July 2, he tweeted, “We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!”

China’s yuan devaluation and pressure on commodities

China’s move to devalue the yuan has put pressure on many commodities, as China is the biggest buyer of many commodities. Because most commodities are priced in the US dollar, a weakening of the yuan against the dollar implies lower purchasing power for China. As a result, a decline in its purchasing power would lead to increased pressure on commodity prices.

All industrial metals are trading down significantly after China’s currency move. Copper prices dropped to a two-year low today while zinc, lead, and tin fell 1.1%, 0.6%, and 1.0%, respectively. Iron ore prices, which have remained resilient in 2019 on the back of supply disruptions and firm Chinese demand, also fell today.

The iShares Commodities Select Strategy ETF (COMT) and the SPDR S&P Metals and Mining ETF (XME) fell 1.08% and 0.90%, respectively, at 9:45 AM EDT today.

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Gold ETFs on a tear

Gold was the only metal bucking this general downtrend in commodities. The SPDR Gold Shares ETF (GLD) was up 1.7% by 9:45 AM EDT. The VanEck Vector Gold Miners ETF (GDX), which tracks the movements in major gold miners and is a leveraged play on gold prices, was trading up 4.3%.

Among the more leveraged ETFs, the Direxion Daily Gold Miners Index Bull 3X Shares ETF (NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (JNUG) were on a tear, rising 12.6% and 16.25%, respectively, by 9:45 AM EDT.

In contrast to the safe-haven assets, the deepening trade conflict between China and the US sent stocks tumbling. The S&P 500 (SPY) and the Nasdaq Composite (QQQ) were trading deep in the red, down 2.0% and 2.6%, respectively, by 9:45 AM EDT today.

Due to the uncertainties surrounding the US-China trade war and the Fed’s pivot, gold has been on a general uptrend since the end of May. Many prominent investors and hedge funds are also recommending that investors buy gold to hedge against potential risks.

Hedge funds also suggest gold

Mark Mobius recommends that investors have at least 10% of their portfolio in gold.

On June 13, DoubleLine’s CEO, Jeffrey Gundlach, also recommended gold, noting, “I am certainly long gold.” The primary reason for his firm conviction stems from his expectation that the US dollar will finish the year lower.

On June 12, billionaire investor Paul Tudor Jones tagged gold as the favorite pick over the next 12 to 24 months.

In Druckenmiller Suggests These Two Trades to Hedge against Meltdown, billionaire investor Stanley Druckenmiller suggests holding US Treasuries and gold in this uncertain environment.

You can read Gold Breaches $1,400: What’s the Next Stop? for our discussion of the drivers for the outlook for gold prices and how most of these drivers are trending in the right direction for higher gold prices.


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