EDITOR NOTE: Prior to the pandemic, the US-China trade war roiled the markets during the entirety of its duration, culminating in a “phase one” deal in December 2019. Now, we’re dealing with a first and second wave of coronavirus infections, a potential trade war with Europe, a continuation of the trade war with China, high US unemployment, more central bank money printing, and, amid a strong stock market rally, the overall effect of all the above on Q3 and Q4 corporate earnings (likely not very good, and that’s an understatement). All bad news? Well, think of what these dismal prospects might do to the price of gold.
Gold prices are retracing from highs today after touching their highest level in more than seven years. The gold price hit a peak of $1,779 yesterday as investors started to diversify their bets. Five key factors are likely to push gold prices higher in the coming days.
Lets dive deeper.
Coronavirus: Second Wave
Investors are largely risk-averse due to the threats of coronavirus second wave. New cases have started to surge. It was expected that there would be some spike in coronavirus cases as economies began to re-open. But what wasn’t priced in was that the situation would start to get out of control just as it did in Texas. New cases have soared 4.5%, and hospitals are close to their full capacity.
Australia has reported its largest one-day spike in coronavirus cases in nearly two months, and this has raised alarm bells of a possible second wave.
The UK has announced the re-opening of its pubs and restaurants, and travel restrictions are likely to be eased off from next month. Remember, the UK was one of the worst countries in terms of dealing with the Covid-19 crisis, and it has the third-largest casualty rate due to coronavirus. If appropriate measures are not taken and respected, we will probably see another coronavirus wave coming to the UK.
Of course, positive news on the Coronavirus vaccine or success in calming down the protests, and protecting the global economy from damage can keep the gold prices in check, and this may halt the sharp rise that I am expecting.
Possible New Tariffs On Europe
Donald Trump, the man who is known for escalating trade tensions, anchored trade tensions once again yesterday. Trump is weighing new tariffs on $3.1 billion of exports from the UK, Spain, France, and Germany. If tensions continue to rise on this issue and Trump doesn’t back off from his stance—which could be one of his tactics to show himself strong ahead of the US elections—investors are likely to steer away from riskier assets.
However, if for some reason, the trade tariffs are avoided, or investors do not see this a potential threat to global economic growth, gold bulls may not succeed in pushing the gold price higher.
China-US Trade War
China is not a country that is going to sit on its hand and let the Trump administration to bully it. The Phase-one US-China trade deal has become immensely fragile due to coronavirus. China has reduced its Agriculture and poultry from the US. There has been confusion about the US-China trade deal, and Trump has also talked about “decoupling” from China. In addition to this, China sees the US stance on Hong Kong as interference in its domestic affairs.
Traders do not like the US picking a fight with the second biggest economy of the world, and we have seen the evidence of this last year that jolted the US stock market.
If, for some reason, we see the relationship between the US and China getting back on track with no further threats to the US-China trade deal, we may not see a massive surge in the gold price.
The US Unemployment Claims
The weekly jobless claims data continue to paint a very dull picture for the US labour market. Sadly, with the regional shutdown of stores in the US, it seems the minor recovery we have seen so far could be under a significant threat as well. In simple terms, the unemployment claims numbers are already ugly, and they are likely to become even worse because companies like Apple AAPL have begun the process of re-closing of their stores in US coronavirus hotspots.
The job market is the most important for the Federal Reserve, and Fed monetary policy is highly reflective of this. The Fed is determined to keep the interest rate lower for longer, and they are unlikely to increase the interest rates anytime soon. Another major central bank, the Bank of England, has provoked a new idea concerning interest rates, and will not increase the interest rates while the government balance sheet is mammoth. Andrew Bailey, the governor of the Bank of England, has talked about this, and, likely, the Fed will also pay attention to this notion.
The third earnings quarter is currently wrapping up. At the beginning of this quarter, there was some hope for improvement as the economies began to re-open. But the emergence of the second corona wave is likely to trigger another cautionary note from US companies, and investors are not going to like it. The US stock market rally that we have seen after the Covid-19 stock market crash could lose its momentum. Again, the risk-off mode is likely to spur interest in gold.
However, if the US corporates start to focus more on the positive side and for some miraculous reason their cash burn ratio goes down, we may not see much movement in the gold prices.
Originally posted on Forbes