Think The Trade War is Influencing Gold? Think Again

At a Glance

  • Four factors are moving the precious metal far more than China/U.S. tensions

After a rise of just about $100 since October, or almost 8 percent, the price of gold has flattened and weakened over the last few weeks.  As trade talks between the U.S. and China have escalated and then subsided, the change in gold has been muted.

In fact, since the uncertainty over the tariff negotiations has ebbed quite a bit, volatility in the gold market has decreased.  So where does gold go from here and what factors are likely to influence the price of the precious metal?

Monetary Policy

The biggest influence on gold prices in the near future is monetary policy, which comes from the Federal Reserve.  Interest rates relate directly to gold prices due to something called “opportunity cost.”  Interest rates are not likely to move higher any time soon as bonds, CDs and other fixed assets may yield nominal returns.  Gold becomes an attractive investment opportunity because the opportunity cost of bypassing these other investment vehicles is low.


For More  Coverage, Visit CME Group’s Trade War Resource Center 


 

Dollar Strength

Another major influencer on the price of gold is the U.S. dollar.  Since the price of gold is dollar denominated, gold prices move inversely with the price of the dollar.  A falling U.S. dollar has the tendency to move gold prices higher because other currencies and commodities increase in value when the dollar decreases.  After a strong rally in the dollar in the fourth quarter of 2018, the dollar has shown some weakness recently, helping gold stay above $1,300/oz.

Brexit

Uncertainty, whether economic or geo-political, helps push gold prices higher.  Nowhere is this outlined better than the current state of Brexit.  After pressure over the “deal or no-deal Brexit” helped to push gold higher, the pause in the current situation due to its likely extension has tempered gold prices. Immediately after the vote to possibly delay Brexit and the rejection of leaving the European Union without a deal, gold futures dropped 1 percent.  The market in general – and gold is certainly no exception – does not like uncertainty.

Economic Data

Other factors influencing gold prices include economic data.  Unemployment and manufacturing data along with GDP projections influence the Fed’s monetary policy decisions which then affect the price of gold.  A stronger U.S. economy has the tendency to push gold prices lower but the recent data regarding unemployment, manufacturing expansion and GDP growth has been anything but stellar.  This data has factored in to the Fed’s current dovish stance on interest rates which in turn has kept the 8 percent rise in gold over the last six months in check.

The ongoing negotiations between the U.S. and China are having less and less of an impact on gold prices as the uncertainty and panic over this situation has decreased.  In my opinion, gold will continue to move based on the strength orweakness of the dollar and on closely watched economic data.

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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