Gold Price Stays Strong Despite Diminishing Trade Fears

Summary

• Gold benefits from weaker dollar even as U.S.-China trade fears melt.

• Threat of a US military response in Syria keeps safety trade intact.

• Rally in oil price also teases the return of gold's inflation component.

Despite diminishing fears of a trade war between the U.S. and China in the last two days, gold has managed to keep its immediate-term rally intact. Granted the gains in the gold price haven’t been significant, but at least the yellow metal is showing some resilience. This is especially welcome after last week’s brief scare when the gold price fell temporarily below its 15-day moving average. While gold has lost (for now at least) the psychological support of rising tensions between the U.S. and China, it still has at least one important support in its favor as we’ll see here. Accordingly, its immediate-term outlook remains positive.

As of Tuesday, the gold price hit its highest level in nearly a week as investors anticipated potential U.S. action against a suspected use of chemical weapons in Syria. President Trump suggested the potential for military action in response to the attack as The White House said he spoke with British Prime Minister Theresa May and the two “agreed not to allow the use of chemical weapons to continue,” according to the Associated Press.

This was just the news gold needed to hear in light of the abatement of tariff concerns between the U.S. and China. The latest geopolitical concern kept gold’s fear component alive and well and enabled the metal to rise for the third straight session. Spot gold rose 0.4 percent on Tuesday while June gold futures settled $5.80, or 0.4 percent, higher to close at $1,346.

Gold was further bolstered as the U.S. dollar index slipped to a two-week low following the news report. The dollar had risen earlier after Chinese President Xi Jinping’s promise to cut import tariffs eased concerns about a trade conflict. Shown here is the PowerShares DB US Dollar Index Bullish Fund (UUP), my dollar proxy, which slipped below its 15-day moving average on Tuesday for the first time since last month. Dollar bulls have managed to rally the UUP price back above this key immediate-term trend line whenever it has slipped under it, so we should expect another attempt at reversing the weakness in coming days.

Source: BigCharts

However, as long as the anticipation of a U.S. military response remains high among investors the gold price should nonetheless be able to shake off the negative effects of any dollar rally attempts. A re-escalation of U.S.-China trade tensions would provide additional psychological support for the metal.

The iShares Gold Trust (IAU), my gold proxy, continues to find support above its rising 15-day moving average as can be seen in the following graph. As per our previous discussions, IAU can not only benefit from any lingering weakness in the U.S. equity market, but it now has the additional potential support of geopolitical instability as its currency component strengthens. Heading into the latest corporate earnings season, stock market remains subject to earnings-related volatility which in turn could serve to increase safe-haven demand for gold based on its fear component.

Source: BigCharts

Then there’s the commodity inflation aspect to gold’s near-term demand picture. As we’ve discussed many times in past reports, one of the most important barometers of the demand for inflation-sensitive commodities like gold is the price of crude oil. When commodity fund managers see oil prices on the rise they typically look to extend their commitments to other assets which benefit from a weakening dollar, the most obvious of these being gold.

Shown here is the daily graph of the iPath S&P GSCI Crude Oil Total Return ETN (OIL), one of my favorite proxies for the crude oil price. Tuesday’s 5 percent rally in OIL pushed its price to a multi-month high which teased a return of an oil rally in the face of the rising threat of a conflagration in Syria. Historically, what bodes well for the oil price bodes well for gold. Accordingly, any additional gains in the oil price from here will signal a return of the inflation trade for gold on top of its recent safety-related demand.

Disclosure: I am/we are long IAU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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