Trump, Trade War, Powell: More Upside for Gold Prices?

Gold prices have gained significant safe-haven bids as investors flock to safety in the face of rising uncertainty. On August 23, the SPDR Gold Shares ETF (GLD), the largest gold-backed ETF, closed up 2.0%. Gold hit a fresh six-year high on Friday as trade tensions between the US and China escalated further.

Firstly, China declared that it would impose tariffs on $75 billion of US goods. This retaliation from China toward the United States’ tariffs on its goods did not sit well with President Trump.

In his trademark style, Trump tweeted how he could escalate these tensions even further. He announced that tariffs would increase from 25% to 30% on the existing $250 billion of Chinese goods from October 1. Plus, the tariffs on $300 billion of Chinese goods, which are expected to kick off on September 1, would also be taxed at a higher rate of 15% rather than 10%.

Also, Trump ordered US companies to start looking for alternatives to China. In a controversial tweet on Friday morning, he said, “Our great American companies are hereby ordered to immediately start looking for an alternative to China.”

In addition to escalating trade tensions, Trump’s controversial tweet about finding an alternative to China hit the US companies with exposure to China especially hard. The S&P 500 (SPY), the Dow Jones Industrial Average Index (DIA), and the Nasdaq Composite (QQQ) plunged 2.57%, 2.39%, and 3.16%, respectively.

The US semiconductor stocks, which have been at the forefront of the US-China trade war, were especially hard hit. The VanEck Vectors Semiconductor ETF (SMH) fell 4.14%, led by losses by Broadcom (AVGO) and NVIDIA (NVDA) of 5.4% and 5.3%, respectively.

Apple (AAPL) is particularly vulnerable to the US-China trade war, as China is its second-largest market after the US. The tech giant is already considering shifting some of its supply chains out of the US. Its stock was trading down by 4.6% when the market closed on August 23.

Trump did not hold back on his criticism of Federal Reserve chair Jerome Powell. On Friday morning, Trump tweeted, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi.”

Trump expects the Fed to drastically cut rates and start quantitative easing to support the US economy, which he touts as being strong. While speaking in Jackson Hole, Wyoming, on August 23, Powell maintained that the Fed would “act as appropriate to sustain the expansion.”

The market expects an interest rate cut of 25 basis points next month. Powell’s dovish statement also led the US dollar to slide. The Invesco DB US Dollar Index Bullish Fund (UUP) dipped 0.56% on Friday.

All these factors have acted favorably for gold. A dovish Fed and expectations of lower interest rates are positive factors for non-income-bearing gold. Because gold is denominated in the dollar, a weaker greenback also favors its movement.

Piling on China’s trade war escalation, Trump’s Twitter rants spooked the markets even further on Friday. These events also supported gold’s safe-haven appeal. Among the sea of red on August 23, gold and gold miners were among the rare green that markets saw that day.

The VanEck Vectors Gold Miners ETF (GDX) jumped 4.0% on Friday. With this, GLD’s and GDX’s year-to-date gains have reached 18.9% and 40.5%, respectively. The gains in more leveraged ETFs such as the Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (JNUG) and the Direxion Daily Gold Miners Index Bull 3X Shares ETF (NUGT) have been more dramatic at 93.4% and 127.9%, respectively.

Among the gold stocks, Eldorado Gold (EGO), Yamana Gold (AUY), and Kinross Gold (KGC) have seen upward price action of 218%, 53.4%, and 52.4%, respectively, year-to-date. This trend is primarily due to their higher operational and financial leverage.

Today in Asian trading, gold was trading higher by about 1% as the Asian markets fell on rising trade tensions. Investors are also expecting a down day for US markets on August 26, as trade negotiations are going nowhere and the inverted yield curve continues to rattle investors. These factors are expected to support gold prices on Monday in US trading as well.

Since the end of May, gold prices have risen about 20%. So, investors might be wondering if it’s still a good time to buy gold. Given the market’s uncertainty, trade tensions, lower interest rate expectations, and political uncertainty, gold might still have a lot of upside left. On August 20, Mark Mobius told Bloomberg, “I think you have to be buying at any level, frankly.”

The ongoing doom-and-gloom scenario gains more strength from the fact that many Wall Street analysts have been warning of an upcoming downturn or an outright recession. Citigroup cut its earnings forecast for the S&P 500 due to ongoing trade tensions. JPMorgan Chase and Bank of America see more downside to equities. Goldman Sachs doesn’t expect a trade deal before the 2020 election.

Prominent investors, Wall Street analysts, and hedge fund managers have been advising investors to go long gold for quite some time. We discussed DoubleLine Capital CEO Jeffrey Gundlach’s take on gold in Gundlach: Fed Has Lost Control—Where is He Investing? He expects gold to rise to $1,600–$1,700 per ounce.

On July 18, we highlighted Ray Dalio’s recommendation of gold due to its risk-reducing and return-enhancing qualities. For the details, check out in Dalio’s Answer to the End of the Lower-Rate Era Is Gold.

On July 8, we wrote about Mobius’s gold recommendation to investors in Why Mobius Says Investors Should Allocate at Least 10% to Gold.

In June, Paul Tudor Jones forecast that gold could hit $1,700 soon if it were to hit $1,400. Now, after crossing $1,550, this upside potential seems like a real possibility.