|09 June, 2019

Gold shines as trade tensions fuel global recession fears

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

Persistent fears over trade tensions and a weaker global economy have pushed gold prices higher

An employee sorts gold bars in the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna, Austria, December 15, 2017. Image used for illustrative purposes.

An employee sorts gold bars in the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna, Austria, December 15, 2017. Image used for illustrative purposes.

REUTERS/Leonhard Foeger

Gold appears to be one of the few positive talking points across financial markets amid a tornado of geopolitical risks, ongoing trade developments and global growth fears.

The precious metal stormed into June extending gains seen in May and blasted above the psychological $1,300 level thanks to rising risk aversion. Persistent fears over trade tensions between the United States and China negatively impacting global growth, depressed equity markets, Brexit and political risk in Europe supported the flight to safety, consequently elevating gold. A weaker dollar amid growing concerns over trade disputes threatening U.S. economic growth also played a leading role in the metal’s resurgence. With the overall mood across financial markets likely to remain negative as investors adopt a guarded approach towards risk, this is certainly good news for gold and other safe-haven assets.

Disappointing economic data from China, Europe, and the United States have the potential to boost attraction towards the precious metal in June. The fact that manufacturing PMI’s around the world confirm contraction are fuelling global recession fears which should keep gold buoyed moving forward. Should trade tensions spark a selloff across emerging markets, this will most likely translate to an increased appetite for safe-haven assets as market players scatter away from riskier assets.

U.S. Treasuries seem to be losing their appeal as expectations mount over the Federal Reserve cutting interest rates this year amid trade disputes. The fact that 10-year treasury yields have fallen 2.1 percent for the first time since 2017 not only flashes warning signals, but suggests that the dollar could weaken further, which could be another support for gold given their inverse correlation.

Market expectations over the Fed cutting interest rates in 2019 coupled with fears over the largest economy in the world experiencing a potential downturn will be warmly welcomed by gold.

Although the metal has offered a mixed performance year-to-date gaining only 2.82 percent, the stars are aligned for bulls to push prices higher towards $1,370.

On the downside for the precious metal, investors need to bear in mind that the dollar could still threaten dold’s shine given how markets still see the greenback as a destination for safety. Should the United States and China miraculously secure a trade deal, global sentiment could improve, ultimately reducing appetite for safe-haven assets.

However, the base case scenario is for gold to remain heavily supported by risk aversion and speculation over the Fed cutting interest rates in 2019.

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