U.S. President Donald Trump once again has shown his affinity for gold, coming to the market’s rescue Thursday as prices fell to a two-month low.
The gold market is heading into the weekend, benefiting from renewed market volatility and geopolitical uncertainty as investors digest the implication of a possible global trade war after Trump announced that his administration would place a 25% tariff on steel imports and a 10% tariff on aluminum.
According to many analysts, the growing threat of a trade war caused a sharp selloff in the U.S. dollar and had shifted focus away from the possibility of more aggressive action from the Federal Reserve. Before Trump’s tariff announcement the growing chance that the Federal Reserve could hike rates four times this year sent the U.S. dollar to a nearly six-week high, which significantly weighed on gold prices.
The U.S. Dollar Index last traded at 90 points, down 0.34% on the day.
Looking forward, analysts say that investors and traders will continue to focus on potential tit-for-tat retaliations from countries like China, Canada and the European Union, adding volatility to financial markets, which will be positive for gold prices.
The Canadian government and the European Union have already sent strong messages to the U.S. “Should restrictions be imposed on Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interests and workers,” said Foreign Affairs Minister Chrystia Freeland.
“We strongly regret this step, which appears to represent a blatant intervention to protect U.S. domestic industry and not to be based on any national security justification... We will not sit idly... The EU will react firmly and commensurately to defend our interests," said European Commission 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 much point to think about rate hike right now. How many times can the Fed hike rates if the global economy weakens because of a trade war.”
Ole Hansen, head of commodity strategy at Saxo Bank, said that not only has gold held critical support, providing short-term technical buying momentum, but he expects investors to continue to diversify into gold because of its safe-haven luster. He said that Saxo Bank’s economic team had put the risks of a recession above 50%.
“An environment of lower growth and higher prices are going to be positive for gold,” he said.
Most analysts are bullish on gold as market volatility is expected to rise in reaction to Trump’s tariff talk, but some analysts, are also warning that prices might not have enough momentum to break resistance at the 2016 highs around $1,375 an ounce.
CME 30-Day Fed Fund futures are currently pricing in three rate hikes this year with about a 29% chance of a fourth rate hike. Markets are pricing in an 83% chance of the first rate hike in March.
LEVELS TO WATCH!
With gold bouncing off critical support above $1,300 an ounce, many analysts are now focused on essential resistance levels. Most analysts see initial resistance at $1.325 an ounce. Gold needs to close above this level to attract new buyers to the marketplace.
Madden said that he could see gold pushing to a near-term high around $1,340 an ounce. He added that a break of that level could lead to a push towards $1,366.
Reference: Kitco
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