The escalation of the US-China trade conflict allowed gold to rewrite 6-year highs and test the psychologically important mark of $1,500 per ounce. If in 2018, thanks to a large-scale fiscal stimulus, the American economy looked like a monolith, and the trade war did not prevent the Fed from raising the rate on federal funds, then in 2019 the situation radically changed. The fading effect of tax reform and the understanding that tariffs are a double-edged sword make the dollar weaken as the conflict escalates. Precious metal actively uses the weakness of its main competitor.
Donald Trump protectionism strengthens the desire of central banks to get rid of dollar dependence and diversify reserves in favor of gold. In January-June, regulators bought 374 tons, which is a new record for the first half of the year. ETF stocks are growing by leaps and bounds, while imports to India are falling amid excessively high prices. Based on these signs, it is safe to say that the bulls dominate the market.
The growing risks of the continuation of the Fed's monetary expansion cycle and the increase in the global debt market with negative returns of more than $15 trillion are forcing investors to increase the share of gold in portfolios. A moderate positive from the US labor market in July could somewhat cool the ardor of XAU/USD buyers because the volatility of gold began to grow. But in reality, everything turned out differently. Investors ignore strong macro statistics across the United States, paying attention only to international risks. CME derivatives raised the chances of lowering the federal funds rate in September to 100%, which allowed gold to continue the rally.
Gold Volatility Dynamics
According to the president of the Federal Reserve Bank of San Francisco, Mary Daly, trade friction is a kind of wind that allows us to understand how the weather vane will behave (the Fed). If this is true, then various issues such as the new duties on Chinese imports, the suspension by Beijing of purchases of American agricultural products and the rise of USD/CNY above psychological mark 7 that practically resolved further easing of monetary policy. Moreover, the slightest signs of deterioration in the health of the US economy will immediately accelerate the correction on the USD index, which will launch a new wave of purchases of precious metals.
China is more aggressive and confident than in 2018, when the fall of the Shanghai Composite signaled serious problems in the economy of the Middle Kingdom. Beijing is ready to tolerate further and hopes that the slowdown in the US GDP will become the basis for the Democrats' victory in elections next year. Goldman Sachs predicts that a deal between the United States and China will be concluded no earlier than November 2020. Also, Morgan Stanley warns that a further exchange of blows is fraught with a recession in the global economy in the middle of next year. Against this background, gold feels like a fish in water.
The technically confident exit of precious metal quotes beyond the triangle with the subsequent update of the June highs inspires confidence in the bulls to achieve targets by 261.8% and 361.8%, according to the AB = CD pattern. They are located near $1525 and $1550 per ounce.
Gold daily chart