Over the past few weeks, gold and silver have felt the love of investors while the world has suffered from a recession fear. Gold is up nearly 19 percent year-to-date (YTD) while silver has soared 7 percent YTD. The recession anxiety has been triggered due to worsening of the trade war between the U.S. and China which jammed the wheels of global growth to an extent that the biggest economy of the Eurozone has posted contraction in its GDP growth. Today, the German final GDP q/q came in at 0.1 percent.
Family Offices And Pension Funds
Investors are anxious that the Federal Reserve Bank will not be able to save the U.S. economy falling from a recession and cutting the interest rates along with other tools of the monetary policy may not be able to help the country. Speculators have started to bet big that the 10-year Treasury yield would sink below zero as soon as 2021. Family offices and pension funds are in the most challenging sphere and they have started their search for positive yielding bonds and this gave birth to negative-yielding bond yields.
The fear of recession pushed the gold price to six years high; it touched the level of 1,555 on August 27, crossed above the target level mentioned previously. However, the price has retraced from this level, currently trading at $1,535. Speculators are wondering if the price is going to move back above the 1,555 mark, especially after the birth of this new optimism that the US economy may not fall into a recession, and more importantly, the US-China trade war isn’t getting any worse.
This is a valid argument, but is it that easy?
Remember, the Fed is more likely to cut the interest rate to support the growth only if the trade war continues. The trade war has brought weakness in the US economic numbers.
Eric Rosengren, Boston Fed president has made it clear that the Fed should not be cutting the interest rate just because of the trade war. Although he has acknowledged the fact that the trade war has made the U.S. economic numbers feeble.
He isn’t the only dissenter on the Fed policy committee because last time we had two dissenters when the Fed cut the interest rate by 25 basis points.
False Hopes And G7 Summit
For me, there was nothing positive from the recent G7 summit and Trump’s speech was once again miss leading the markets. The fact is that both sides are really far apart from what they want to achieve and more importantly, the terms on which they want a deal. President Trump is still undermining the strength of the Chinese politicians and he is wrong in thinking that China will cave in
How Likely Is It For Gold Price To Touch 1,800?
The fact is that in the absence of a trade deal, the economic data will continue to deteriorate , global growth will slow, manufacturing data will continue to become worse and central banks will have no option but to support the markets with whatever they have.
The Fed is under immense pressure to keep cutting the interest rates. Trump has also already shown his preference with respect to interest rates: he wants the Fed to cut the interest rate by another 100 basis points. Sound ridiculous given the strength of the U.S. economy.
To conclude, speculators have their target level and if the Fed follows this path then it means that the gold price is not only going to melt the resistance of $1,600 but it may actually touch $1,800.