Gold Is Not Benefiting From Trade Wars Because Of This One Factor - CME Group
(Kitco News)- Rising inflation fears could be the reason why gold is notdoing better with the U.S. and China on the brink of a full-fledged trade war,according to the chief economist at CME Group.
Although U.S. investors have a small reprieve from trade-wartalks as markets are closed in celebration of Independence Day, many arewaiting to see what will happen after the holiday. Friday is the U.S.government’s deadline to implement $34 billion in tariffs on imported Chinesegoods. The Chinese government has threatened to retaliate in kind on the sameday.
Despite the looming geopolitical threats, the gold price hasbeen lackluster with prices hovering at levels not seen since the start of theyear. CME’s Globex electronic exchange is open until 1 p.m. EDT and in a veryquiet marketplace, August gold futures --showing modestly positive gains --last traded at $1,256.80 an ounce, up 0.26% on the day.
In a report Wednesday, Blu Putnam, chief economist at the CMEGroup, said that gold is not benefiting from growing trade tensions because ofrising inflation.
“The problem for gold is that it does not bear any interest,and the Federal Reserve is pushing short-term rates higher,” he said. “If coreinflation was to move well above the Fed's 2 percent target, the Fed would pushrates even higher to stay abreast of rising inflation.”
Putnam said that if gold prices are going to move higher, themarket needs to see lower inflation, which would take the pressure off centralbank to hike rates.
Many analysts have noted rising real interest rates has had asignificant impact on gold prices. The market has been in a significantdowntrend since the June Federal Reserve monetary policy meeting. Not only didthe central bank raise interest rates by 25 basis points but the committee alsosees two more rate hikes this year.
Rising interest rates have caused a substantial increase inreal interest rates. Data from the U.S. Treasury Department shows the realinterest rate on 10-year bonds at 83 basis points, up 20% from the start of theyear.
Whileinflation is weighing on sentiment in the precious metals sector, the CME seesstrong trading activity in the marketplace. Tuesday the CME group reported thataverage daily trading volume in gold futures and options in the second quartertotaled 383,000 contracts, an increase of 29% compared to the second quarter of2017.
By Neils ChristensenFor Kitco News
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