Kitco News Weekly Outlook: Gold Prices Shine In A Global Trade War - Analysts
(Kitco News)- U.S. President Donald Trump once again has shown hisaffinity for gold, coming to the market’s rescue Thursday as prices fell to atwo-month low.
The gold market is heading into the weekend, benefiting from renewedmarket volatility and geopolitical uncertainty as investors digest theimplication of a possible global trade war after Trump announced that hisadministration would place a 25% tariff on steel imports and a 10% tariff onaluminum.
While April gold futures are seeing its second week oflosses, the market has significantly improved after prices tested support at atwo-month low, just above $1,300 an ounce. April gold futures last traded at$1,320.50 an ounce down less than 1% since last week.
Silver prices have managed to outperform gold this past weekeven though it is ending its second week in negative territory. May silverfutures last traded at $16.47, down 0.50% from last week. However, silvercontinues to disappoint many investors as prices have struggled to push above$17 an ounce.
According to many analysts, the growing threat of a tradewar caused a sharp selloff in the U.S. dollar and had shifted focus away fromthe possibility of more aggressive action from the Federal Reserve. Before Trump’s tariff announcement thegrowing chance that the Federal Reserve could hike rates four times this yearsent the U.S. dollar to a nearly six-week high, which significantly weighed ongold prices.
The U.S. Dollar Index last traded at 90 points, down 0.34%on the day.
Looking forward, analysts say that investors and traderswill continue to focus on potential tit-for-tat retaliations from countrieslike China, Canada and the European Union, adding volatility to financialmarkets, which will be positive for gold prices.
The Canadian government and the European Union have alreadysent strong messages to the U.S. “Should restrictions be imposed on Canadiansteel and aluminum products, Canada will take responsive measures to defend itstrade interests and workers,” said Foreign Affairs Minister Chrystia Freeland.
“We strongly regret this step, which appears to represent ablatant intervention to protect U.S. domestic industry and not to be based onany national security justification... We will not sit idly... The EU willreact firmly and commensurately to defend our interests," said EuropeanCommission chief executive Jean-Claude Juncker.
“I think the trade rhetoric is only going to get hotter,”said David Madden, market analyst at CMC Markets. “I don’t think there is muchpoint to think about rate hike right now. How many times can the Fed hike ratesif the global economy weakens because of a trade war.”
Ole Hansen, head of commodity strategy at Saxo Bank, saidthat not only has gold held critical support, providing short-term technicalbuying momentum, but he expects investors to continue to diversify into goldbecause of its safe-haven luster. He said that Saxo Bank’s economic team hadput the risks of a recession above 50%.
“An environment of lower growth and higher prices are goingto be positive for gold,” he said.
Don’t Completely RuleOut Rate Hikes
Most analysts are bullish on gold as market volatility isexpected to rise in reaction to Trump’s tariff talk, but some analysts, arealso warning that prices might not have enough momentum to break resistance atthe 2016 highs around $1,375 an ounce.
“The market has moved well off of tremendous support and Ithink we will push higher but it will be difficult for gold to break out of itschannel ahead of the March monetary policy meeting,” said Bill Baruch,president of Blue Line Futures. “I think we will have to wait until April beforewe see gold take off.”
Michael Howell, managing director at Crossborder Capital,said in a recent interview with Kitco News that he could see gold pricesstruggle ahead of the Federal Reserve’s monetary policy decision March 21.However, he said that he considers any dip in the gold price as a long-termbuying opportunity.
“We have been telling clients to buy gold on weaknessbecause it will be higher in 18 months,” he said. “On the whole, the entirefinancial background has to be positive for gold.”
Lukman Otunuga, research analyst at FXTM, also said goldcould take a volatile rollercoaster ride this month as investors bounce betweenproducts of global economic uncertainty and rising interest rates.
“While Gold could remain supported by the skittish sentimentand softer Dollar, prospects of higher US interest rates have the ability tolimit upside gains. It must be kept in mind that Gold is a zero-yielding assetthat tends to lose its allure in a high-interest rate environment,” he said.
CME 30-Day Fed Fund futures are currently pricing in threerate hikes this year with about a 29% chance of a fourth rate hike. Markets arepricing in an 83% chance of the first rate hike in March.
How To Play The GoldMarket
While the time to buy gold was when prices were at atwo-month low, Baruch said that current prices still represent an excellentbuying opportunity.
He added that he likes buying gold and hedging his downsiderisk with options.
“I am buying April gold futures and $1,300 puts to protectmy position,” he said. “At these levels, you want to be long, but you also wantto manage your risks to the downside. I like being long unless gold breaksbelow its 200-day moving average.”
Hansen described the current gold environment as a tradersmarket. He said that investors could buy at current levels as there is stillroom for prices to move higher in the near-term, but investors should be quickto take profits.
Levels To Watch
With gold bouncing off critical support above $1,300 anounce, many analysts are now focused on essential resistance levels. Mostanalysts see initial resistance at $1.325 an ounce. Gold needs to close abovethis level to attract new buyers to the marketplace.
Madden said that he could see gold pushing to a near-termhigh around $1,340 an ounce. He added that a break of that level could lead toa push towards $1,366.
The Final Say...
It is a busy week for economic data with the main event nextFriday as the U.S. government will release employment data for January. Aheadof the nonfarm payrolls markets will receive crucial service-sector sentimentdata and private sector employment numbers.
The European Central Bank will hold its monetary policymeeting next week with a decision released Thursday. The ECB has been animportant factor for the gold market as expected monetary policy tightening hasboosted the euro against the U.S. dollar, which has been positive for gold.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.