The Problem For Gold In The Trade War

Gold prices are continuing to move lower.  The yellow metal is often used for portfolio diversification or as a hedge against global political and economic tensions.

This time around, though, gold just has not been a useful hedge for the trade war, with the declaration of tariffs on steel and aluminum, and on goods imported from China. The European Union, Mexico and China have retaliated with tariffs of their own.

The problem for gold is that it does not bear any interest, and the Federal Reserve (Fed) is pushing  short-term rates higher.  If core inflation was to move well above the Fed’s 2 percent target, the Fed would push rates even higher to stay abreast of rising inflation. The Fed has indicated that it intends to raise interest rates twice in the second half of this year.

On the other side of the coin, it looks like gold will not move higher unless there is a surprise risk element and inflation drifts lower — taking the pressure off the Fed to raise rates.

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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