Gold Hammered by Strong Dollar Friday As Trade War Remains in Focus
Precious metals struggled Friday. Though gold hit a two week high earlier in the week climbing to $1,313, Friday saw gold hammered by strong dollar index. Trade war and tariffs dominated headlines. President Trump levied 25% tariffs on 800 Chinese imported goods, and China countered with their own tariffs. In this environment the dollar surged to an 11-month high, and gold pulled back to $1,280. Prior to the announcement, gold had rallied on uncertainty, but the dollar’s pick up in strength brought it down on Friday.
What this means for investors:Trade wars in a rising rate economy like what we are seeing right now never bode well. Read back on what happened with the Smoot Hawley Tariff Act in 1930 that contributed to sinking the economy into the Great Depression. This week the trade spat with China strengthened the dollar thereby hammering gold prices, but this is a short term effect. Furthermore, although gold priced in dollars was down this week, gold priced in nearly very other world currency is up as currencies around the world teeter.
Commodities and Stocks Down
Gold was acting more in line with commodities than as a safe haven as it fell this week. The whole commodities sector reacted negatively to the tariff announcement. The stock market also had a rough close to the week. Gold didn’t get the safe haven lift that it usually does when the equity market drops because of the dollar’s renewed strength Friday.
What this mean for investors: Inflation and geopolitics are still factors for the gold trade. The geopolitics trade has been quieter lately due to the diplomatic meeting between President Trump and north Korean leader Kim Jong-Un. Trade war and Middle East conflict will increase tensions though.
Eyes Were on the the Fed and ECB This Week
The world’s leading central banks announced monetary policies that helped gold prices this week. The Federal Reserve raised interest rates another quarter point this week, giving gold prices a boost. In the European Union, the European Central Bank’s Mario Draghi is putting the brakes on. Uncertainty and volatility are becoming a prominent feature in the Eurozone as Italy’s populist, Europskeptic governing party toys with the idea of alternate currency and excessive spending. Additionally, the whole southern EU region is seeing a slowdown, which is worrying investors and bankers.
What this means for investors: The Fed is expecting to raise rates a few more times this year. The more hawkish monetary stance could be too much too fast. Gold’s boost from the rate rises is an indicator of that.
Economy Expected to Slow? Inflation Grows at Fastest Pace in 6 Years
Despite Fed chair’s optimism this week, analysts are predicting an economic slowdown in 2019. The International Monetary Fund (IMF) cautioned that the current optimism in the global economy’s growth would stagnate by 2020. The report cited trade war and rising inflation as reasons. Other estimates are that the U.S. economy will slow sooner.
What this means for investors: The stock market is continuing to surge, unemployment is at an 18-year low, and earnings reports are solid right now. However wage growth has not been keeping up, and earnings growth is expected to stall. Inflation is growing at the fastest pace in six years and eating away at wage growth. As prices rise and wages stall, less spending means a slower economy. This is why buying gold when it’s down before hard times hit pays off in the end.
As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at 602-955-6500 or toll-free at 877-354-4040.