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Gold Starting to Shine Again

Written by Luke Burgess
Posted June 3, 2019

The price of gold rose this morning to its highest levels in over two months, as trade disputes between the United States and China continue to mount and fears grow that Trump's tariffs on Mexico will slow the global economy.

At last look, gold for August delivery was trading up 0.79% today at $1,321.50 per ounce.

Following warnings that it would begin blacklisting foreign companies from the country's massive market, China said over the weekend it will not back down from a trade war with the U.S. The fresh threat comes as Beijing begins to investigate FedEx after Huawei said the delivery company diverted packages to the U.S. intended for the company's office in China.

Meanwhile, the market is trying to determine how new U.S. tariffs on Mexico could affect the global economy. President Trump claims Mexico has long taken advantage of the U.S. and new tariffs will end that abuse.

The president's frustration with Mexico stems from the flow of incoming migrants (or at least that's the narrative). Trump said last week he will impose tariffs to pressure the Mexican government to prevent the stream of illegal immigrants into the United States. The president said import taxes would increase by 5% every month through October, topping out at 25%.

All this prompted investors to raise bets that the Fed would cut interest rates sooner than later. The most recent Commitment of Traders report showed hedge funds and money managers increasing their net long positions in gold in the week to May 28.

Meanwhile, holdings in the SPDR Gold Trust ETF increased 0.32% to 743.21 metric tonnes on Friday.

Where Does Gold Go From Here?

I expect the price of gold to continue inching higher in the very short term as trade disputes and fears of economic slowdown fester. But I would not bet on seeing gold anywhere near $1,400 an ounce in the near term without another major conflict.

Gold prices have been hovering just below $1,300 an ounce for months. Any major move higher right now will only result in profit-taking and subdued gold prices. So I wouldn't get too excited about gold just yet.

Nevertheless, it's very unlikely Mr. Trump will back down from trade disputes anytime soon. And considering the market's most recent reaction, I do believe it's a good idea to own gold for safety (not profit) right now.

Gold, You've Changed, Man

Over the past two decades, gold has become less and less of a market hedge. If you recall, the price of gold went nuts following 9/11.

And throughout the financial crisis of 2008, the yellow metal would react positively to such terrorist attacks and market fears.

Since around 2012, however, gold has become less reactive to market turmoil.

Terrorist attacks no longer affect gold at all. And recent market downturns have had little, if any, effect on the yellow metal.

Neils Christensen of Kitco writes, “Resilient investor optimism in equity markets has reduced gold’s attraction as a safe-haven asset.”

Some have even suggested gold isn't a market hedge anymore. But gold's hedge appeal might be back on the rise.

Ross Norman, chief executive at British bullion house Sharps Pixley, says, “Safe-haven buyers are coming back to gold again, due to tariff-talks, which is encouraging for the metal.”

Time will tell.

Until next time,
Luke Burgess Signature
Luke Burgess

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As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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