All that glitters is gold

Stock market volatility, dollar weakness and geopolitical concerns may help the yellow metal mount a comeback.

Lukman Otunuga, OpinionIndustry Expert
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.

March 26, 2018

March was a month for the history books, and one that certainly kept the financial markets on their toes. President Trump created tremors by imposing tariffs on steel and aluminum, sparking concerns that a global trade war was brewing. The markets, now somewhat hardened to Trumpenomics and wars of words, took the threat of a trade war far more seriously than previous machinations. The ultimate result of which was increasing risk aversion and an accelerated flight to safety.

Gold is the natural beneficiary of this rising concern; the yellow metal is the traditional sanctuary for investors seeking protection from volatility and market uncertainty. While gold has suffered recently under the weight of a variety of themes – optimism over the global economy, U.S. tax reforms and rate hike expectations to name a few – the tables are slowly turning. Stock market volatility, dollar weakness and geopolitical concerns may help gold mount a comeback.

The dollar has historically had an inverse relationship with gold. March’s unexpectedly dovish FOMC (Federal Open Market Committee) meeting, where new chair Jerome Powell failed to upgrade the ‘dot plot’ forecast from three interest rate hikes to four, punished the dollar. Optimism that tax reforms will elevate the U.S. economy might have helped support the greenback recently, but fears of a global trade war are now overshadowing the benefits of tax reforms. Friday’s announcement that the U.S. will impose tariffs on up to $60 billion of Chinese goods – and China’s ascertain of retaliation – only worsened these fears and saw the dollar nosedive to its lowest level against the yen since the 2016 election.

For the moment, gold remains a battleground for bulls and bears. The current global developments have injected gold bulls with a renewed sense of confidence, but whether trade war fears will be realised is a different matter entirely. President Trump teased world powers with the possibility of exemptions from his aluminum and steel tariffs early on, granting Canada and Mexico a free pass as he signed the original tariff order. Late last week, the E.U., Australia, South Korea, Argentina and Brazil were all granted similar exemptions. Will a U.S.-China trade war have the same impact on gold as a full-on global spat? It’s hard to say. If market volatility remains a key theme as trade war fears continue and political uncertainty weakens the dollar, gold has scope to gain momentum and appreciate further.

But gold also has other champions on the horizon. Ongoing speculation over inflation building momentum could also see the yellow metal surge, although if rising inflation gives way to higher rates it would punish it. Conversely, speculation that some central banks are stockpiling gold to combat inflation may boost the metal further.

Alternatively, if markets somehow stabilise, expectations heighten over higher U.S. interest rates, and trade war fears become a theme of the past, the yellow metal may find itself out a fashion as investors turn to riskier assets.

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