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High market volatility and uncertainty surrounding the global trade war doesn’t seem to be helping Gold, whose demand usually increases in times of economic and geopolitical uncertainty. Rather, Gold prices seem to be driven more by the changes in the value of the U.S. Dollar.
Factors pushing the Dollar higher
The Dollar remains strong despite increasing trade tensions and general uncertainty. Recent Trump policies have been quite abrupt, which suggests that his views on tariffs on China could quickly change – consider his rapidly alternating stances on North Korea.
Expectations of further U.S. rate hikes also support the rise of the Dollar, while also pushing bond yields up – especially now that monetary policies are diverging among other major economies. The FED is expected to increase interest rates, while many other central banks, such as the BoJ and the ECB, are taking more dovish stances.
USD expected to continue rising, Gold expected to continue falling
Why? Because both assets are negatively correlated, which means that they tend to evolve in opposite directions. As Gold is priced in USD, any changes in its value (which acts as the world’s reserve currency) impacts the value of the currency that foreign buyers hold, increasing or decreasing demand for Gold, thus affecting prices.
Rising Dollar possibly seen as commodity buying opportunity
As recent weakness has brought prices back to significant support levels, some buyers might be waiting to enter the commodity market to take advantage of a rebound, creating a short-term upward movement. Any future lower-than-expected figures on the American economy and inflation could support the price of Gold, provided that these statistics change the forecast of the Federal Reserve, thus influencing its members about interest rate changes.
Future Gold demand
If geopolitical turmoil escalates further - with more aggressive rhetoric and further decision-making driven by protectionism - market volatility and higher uncertainty could lead investors to remove money from risky assets to seek safer options, such as Gold. This is a financial market phenomenon called flight-to-quality, which is often seen in times of uncertainty.
As Gold doesn’t offer any yield, investors prefer to invest in fixed-income products that yield a fixed income, or more risky, but more profitable, assets. Over the long term, the demand for Gold as an investment should then remain low, but buying Gold for its decorative value (especially from China and India) should at least somewhat support prices. Indeed, India is one of Gold’s largest sources of demand, annually accounting for 25% of total global sales, especially during the festive and wedding season.
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