President Trump announced a 5% tariff on Mexican goods. It added to the concerns about the state of the U.S. economy and prompted the Fed officials to soften their language. With no end to the U.S. - China trade dispute in sight, gold jumped above $1,330 in response. Can it move higher still?
Gold Rises on Trade Tensions
Good news for gold bulls! As the chart below shows, the price of the yellow metal has already crossed the level of $1,330, within spitting distance of the 2019 record high of $1,344. What is happening?
Chart 1: Gold prices from June 4 to June 6, 2019
Well, one reason is trade wars. Dashing the hopes of many, the United States and China have not signed a trade deal. Instead, the trade tensions have escalated recently. And the world economy feels the pinch. According to the International Monetary Fund, the fresh tariffs announced in 2018-19 would cut global GDP by 0.5 percent next year. That's $455bn - larger than the size of South Africa's economy.
However, Donald Trump seems unimpressed. With unshakable perseverance, the trade wars roll on. Last week, Trump has surprisingly threatened action against Mexico, the biggest U.S. trade partner for goods, unless its government curbs the immigration into the U.S. The President is to place a 5% tariff on all Mexican goods from June 10 and it would increase the tariff steadily to 25 percent by October, until illegal immigration across the southern border was stopped.
Gold Rises on Recessionary Worries, Too
Trump's more aggressive stance toward China and Mexico have added to already existing concerns about the health and prospects of the global economy. Factory activity slowed in the United States, Europe and Asia last month. And the current American expansion already goes on for 120 months, equaling with the longest boom in the U.S. history that lasted from March 1991 to March 2001. The worries are thus understandable. And although expansions do not die of old age, we have recently seen certain disturbing signs. On Tuesday, we have examined the alarming inversion of the yield curve, which deepened in May.
Moreover, yesterday, the ADP announced that the private-sector employers hired only 27,000 people in May, a huge miss from the expected 175,000 job gains. It means that ADP private-sector job growth tumbled to a 9-year low, which suggests that the Friday's official employment report from the Labor Department will be also disappointing. In particular, if the unemployment rate increases, it might be a reason to worry. After all, the yield curve and the unemployment rate are the two most reliable recession indicators. So far, only the former is blinking red. But if the latter also starts sending warnings, then it might be a time for ringing a bell. And what do you do when you hear an alarm? You escape. You switch from risky assets into the risk-off mode and safe havens such as gold.
Gold Rises on Dovish Fed, as well
So the Fed could not remain silent. The US central bank has already soften its tone. On Monday, James Bullard, St. Louis Fed President, said that a rate cut may be "warranted soon". One day later, Jerome Powell, the Fed Chairman, said that the central bank was prepared to support the economy:
We do not know how or when these issues will be resolved... We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.
Hence, the recent rally in gold prices has been reflecting a more dovish Fed and a speculation on the federal funds rate cut. The future markets ascribe a 94-percent probability of the interest rates cut by September. Although we still are not fully convinced that the cut is needed and coming, it might be difficult for the Fed officials to disregard markets' expectations, especially if May's nonfarm payrolls fall short of expectations, while Trump's trade wars go on.
Similarly, the recession is not inevitable. It's possible that Trump will end its aggressive stance in the near future to goose the economy just in time before the elections in 2020. Or, does he want to be a one-term president? The temperature is rising and gold prices are on the move. Stay tuned - Tuesday we'll discuss Friday's employment report in detail!
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.