What a Trade War With China Means for Gold

At a Glance

  • Gold’s safe haven attributes could increase, but it all comes down to the U.S. dollar

A trade war has been the looming specter in the marketplace for months now.  The United States has flirted with trade disputes with just about every one of our trade partners; Mexico, Canada and even the European Union.

But, the major dispute that has everyone concerned is with China, one of our largest trading partners.  An all-out trade war with China would be destabilizing to the global economy to put it lightly. One of the big issues tied to this dispute is how this will affect the price of gold.

Just the fear of such a trade war should increase the perceived safe-haven attributes of gold.   If this fear becomes reality, a rotation out of “risk-on” assets such as U.S. equities will likely follow. The freed up cash flow could then flow into “risk-off” assets like gold which should support its prices.

What this all comes down to is how the U.S. dollar will react.  It is hard to believe that the dollar will not hold its own against emerging market currencies, and even many developed nations’ currencies with the possible exception of safe haven currencies like the Swiss Franc.  Dollar denominated gold would therefore increase in price.

More Than Tariffs

Interest rates need to be closely monitored as the China-U.S. trade battle ratchets up. It is possible that a portion of the recent selloff in the bond market could be connected to concerns that China could use other measures to retaliate against the U.S. With Beijing seen as having limited room to match tariffs over the long term, China could attempt to dump bonds to drive up borrowing costs in the U.S. The 10-year Treasury yield currently stands at 3.059 percent.  This would also increase the price of gold.

However, these types of disputes tend to work themselves out.   In the absence of the risks mentioned above, what should happen to the price of gold?  We have a stock market that continues to move higher and a central bank that has signaled it is going to continue to raise interest rates for the near future.  Gold is a commodity that yields no interest and provides no dividend and that may keep a cap on the price for the time being.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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