Gold Prices to Benefit from Threat of Trade, Currency War

Gold Price Talking Points

The price of gold attempts to retrace the decline from earlier this week as negotiations between the US and China appear to be stalling, and current market conditions may keep the precious metal afloat amid little signs of an imminent trade deal.

Gold Prices to Benefit from Threat of Trade, Currency War

U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizerare flying to Shanghai to meet with Chinese Vice Premier Liu He on July 30, but the ad hoc trip suggests there’s been little progress in achieving a trade agreement as China’s State Council pledges to ‘adopt a combination of short-term and long-term, micro and macro measures” to address the risks surrounding the economy.

The ongoing tension between the US and China may heighten the appeal of gold as it puts pressure on the Federal Reserve to reverse the four rate hikes from 2018. The threat of a policy error may encourage market participants to hedge against fiat currencies as there appears to be dissenting views within the Federal Open Market Committee.

At the same time, there appears to be a growing risk for a currency war as Koichi Hamada, an economic advisor to Japanese Prime Shinzo Abe, insists that the Bank of Japan (BoJ) may have to act to prevent the Yen from appreciating, and gold prices may continue to benefit from the current environment as there seems to a flight to safety.

With that said, gold prices may exhibit a more bullish behavior over the near term, and the precious metal looks poised to extend the advance from the monthly-low ($1382) as it breaks out of a holding pattern.

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Gold Price Daily Chart

  • The broader outlook for gold is no longer mired by a head-and-shoulders formation as both price and the Relative Strength Index (RSI) break out of the bearish trends from earlier this year.
  • Moreover, the recent pullback in bullion appears to have run its course as the Fibonacci overlap around $1380 (100% expansion) to $1385 (78.6% expansion) offers support, and the price of gold may exhibit a more bullish behavior as it breaks out of a triangle/wedge formation.
  • In turn, topside targets are back on the radar for gold, with the failed attempt to break/close below the $1418 (100% expansion) to $1422 (23.6% expansion) region raising the risk for a move back towards $1444 (161.8% expansion) to $1448 (382.% retracement).
  • Next region of interest comes in around $1457 (100% expansion) followed by the $1467 (50% expansion) area.

For more in-depth analysis, check out the 3Q 2019 Forecast for Gold

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.