Gold has struggled to live up to its title as a 'safe haven' for investors, despite heightened global trade tensions weighing heavily on sentiment and eroding risk appetite.
One would have expected gold to shine in times of extreme market uncertainty and volatility. However, we have witnessed the complete opposite with prices shedding roughly 8.5 percent this year. The firmly bearish price action witnessed in recent months continues to highlight how gold’s prospects remain pegged to the dollar’s performance.
With the greenback buoyed by expectations of higher US interest, attraction for gold, which offers no yield, is likely to diminish even further. It is also worth noting that the greenback has wrested away a fair chunk of gold’s safe-haven allure based on the bullish sentiment towards the US economy. Investors are of the belief that robust economic growth will cushion the United States from any negative impacts a trade war may present, ultimately transforming the dollar into a go-to currency for safety.
The turmoil sweeping across emerging markets will play a significant role in gold’s trajectory in the coming weeks. While a suffocating sense of uncertainty may fuel risk aversion and accelerate the flight to safety, this could offer little-to-no support for gold. It is worth noting that emerging markets are the biggest consumers of physical gold, and with their currencies currently taking a beating, their purchasing power decreases. A fall in purchasing power is naturally very bad news for gold and is likely to compound the metal’s woes.
Gold’s short-to medium-term outlook remains influenced by the dollar’s performance, rate hike speculation and global trade developments. With the Federal Reserve expected to raise interest rates this month and possibly in December, zero-yielding gold is destined for further weakness with $1,185 and $1,160 acting as key points of interest.
In regards to the longer-term outlook, this will depend on escalating US-China trade tensions. If trade tensions hit a dangerous tipping point with a full-blown trade war becoming reality, extreme risk aversion may become a dominant theme. Such a scenario could revive appetite for gold, consequently sending prices towards $1,260 and $1,300, respectively.
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