Where Next For Gold After Touching the $1,300 Mark?

On Monday, the price of gold has briefly jumped above $1,300. For the next two days, the yellow metal has been holding near that important psychological level, although it failed to rally subsequently. Let’s take a look at the trigger(s) of the upward move. The reaction of the gold market over the following days is pretty telling...

China Strikes Back

It has been a hot week! Indeed, just look at the chart below. As you can see, the price of the yellow metal leaped to $1,300 on Monday, even surpassing briefly that key level. What happened exactly?

Chart 1: Gold prices from May 13 to May 15, 2019.

First of all, China has imposed new retaliatory tariffs on $60 billion worth of U.S. goods in a response to the raise in tariffs from 10 to 25 percent on $200 billion worth Chinese goods levied by Trump on Friday. The Red Dragon announced higher tariffs – they are going to raise them from 10 to 15 and 25 percent, depending on the product – on goods ranging from liquefied natural gas to toothpaste. The Wall Street did not welcome the move: the S&P 500 Index fell 2.4 percent, its worst day since early January, while the NASDAQ dropped 3.4 percent, its greatest loss since early December 2018.

The risk-off sentiment triggered by the renewed trade war clearly helped gold, a safe-haven asset. Moreover, after the stock market turmoil, investors increased their bets that the Fed will have to cut the federal funds rate later this year. The market odds of such a move in 2019 rose to 75 percent from about 40 percent one month ago. Such dovish expectations made the bond yields to decline, as one can see in the chart below. Lower interest rates also supported the gold prices. 

Chart 2: Yield on the US 10-year Treasuries from May 2, to May 15, 2019.

Retail Sales and Industrial Production Disappoint

Second, some key economic reports have been released this week, bringing a negative surprise to the markets. They can’t explain the gold prices’ rise to $1,300, which happened earlier, but they could support the yellow metal in hovering around that level on Wednesday. We mean here, of course, the surprising decline of retail sales in April. The sales at U.S. retailers fell 0.2 percent last month, marking the second decrease over the last three months. The drop is disturbing as healthy labor market should translate into solid spending.

Moreover, industrial production fell 0.5 in April. Both these reports suggest softer second-quarter growth rate. Indeed, the Atlanta Fed forecasts now that the US GDP will increase 1.1 percent in the second quarter, compared to 1.6 percent rate expected before the April data on retail sales and industrial production. Slower economic growth is better for the gold prices than faster expansion, but it might be not enough to trigger a genuine rally.

Implications for Gold

What does it all mean for the gold market? Well, the weaker than expected economic reports and elevated geopolitical uncertainty (due not only to the trade wars, but also to the rising tensions between the US and Iran) should support the gold prices. However, the gold’s failure to rise more decisively is more than telling. In part, it can result from Tuesday’s more upbeat comments from American and Chinese officials on striking a trade deal. But it might also suggest that we have still a goldilocks economy, and that gold is still not ready to rally. We could see short-term volatility, especially if tensions with Iran escalate into something bigger. But – given the lack of recessionary signals and the greenback’s solid position – we do not yet see a fundamental game-changer for the gold market.