Each time escalating trade tensions spark fears over a global recession, investors stampede into prime safety destinations like Gold.
Driven by intense bouts of safe haven buying, the precious metal sped ahead, rising by 5 percent in August. It then hit a pothole on Thursday September 5, crashing by three percent in less than 24 hours on the hopes that the US and China can settle their trade differences in October. While risk-on returned with full force after the US President indicated that renewed trade talks with China would go ahead in October, one cannot help being wary after more than a year of tariff hikes, tough rhetoric and abandoned trade talks. It must be said that any investor celebrations may be premature because it cannot be denied that the US and China now place enormous importance on zero sum negotiating tactics with punitive tariffs.
Meanwhile, underlying economic conditions in both countries are slowly showing signs of deterioration. The latest reading on US employment shows fewer jobs were added to the economy in July and August. China’s growth weakened in the second quarter, adding to the impression that the zero sum tactics are squeezing investor sentiment and hindering the conveniences of bilateral trading.
Riskier assets positioned for more pain if trade tensions return
Unlike Gold, global stock markets are vulnerable to the zero-sum negotiating tactics which spread so much fear among investors.
Although the S&P 500 has gained 1.53 percent quarter to date (QTD), it may be instore for high levels of volatility in September under the present circumstances.
Ever since the 2008 financial crisis, bond instruments like Treasuries changed character from being the conservative investment to being the weathervane for troubled financial markets. After the long-term and short-term bond yield curves inverted in August, investors are expecting more signs of a recession in the US.
If there are any more signs that the global economy is weakening, Gold will shine with glaring intensity.
How long can Gold’s rise be sustained?
It is a sobering fact that the global trading and manufacturing system is heavily pressured by the zero-sum tariff tactics used in the US-China trade disputes.
The damage has extended past the initial problems such as reduced sales and profits and now threatens the health of factory output and jobs, two important economic players. Global economic growth was fragile to begin with, before the tit-for-tat tariff hikes, and investors are faced with the slippery slope of volatility in assets and uncertainty in worldwide trade and commerce.
If there are more red lights ahead, investors may decide to keep going for Gold, possibly sustaining its rising trend until the end of the year. Alternatively, if trade talks do indeed materialise and negotiations reach a speedy deal, the rush on Gold may subside as rapidly as it rose.
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