Gold Price Spikes to Monthly Highs: 2 Reasons Why

• Gold’s price peaks at $1,487.70/oz Tuesday, the highest since Nov. 6.
• Stock markets erroneously priced in a December ‘phase one’ trade agreement between the U.S. and China.
• The U.S. dollar index hits monthly lows.

The price of gold rallied on Tuesday, as risk aversion dictated market sentiment following President Trump’s latest trade-war tirade.

February gold futures rose 1.2% to $1,487.70 a troy ounce, the highest since Nov. 6 on the Comex division of the New York Mercantile Exchange.

Trade Deal Erroneously Priced into Market

Precious metals rallied as investors dumped risk assets over news that President Trump was willing to let trade talks with China drag on indefinitely. The Dow Jones Industrial Average dumped more than 400 points in its worst single-day performances in months.

Six weeks after first announcing a preliminary trade deal with China, President Trump told reporters Tuesday he was in no rush to finalize the agreement. The president’s comments sent shock waves across the financial markets, which until now had been pricing in a ‘phase one’ deal by December’s end.

It’s clear by now that markets have gotten it wrong and the S&P 500’s 11 record closes in November were overdone. Not only is a phase one deal not coming this month, the U.S. and China remain far apart on core issues like tariffs and technology transfers.

And even if phase one were to get done, it does nothing to address the long-standing issues that forced President Trump to confront China in the first place. The trade war, now in its 16th month, will likely continue indefinitely.

U.S. Dollar Hits Monthly Low

The relationship between gold and the U.S. dollar is a complicated one, but the two assets often move inversely with another over time. Although gold is more sensitive to real interest rates, the performance of the dollar impacts short-term demand for the commodity as holders of other currencies need to acquire greenbacks to trade the yellow metal.

On Tuesday, the U.S. dollar fell 0.2% against a basket of currencies, reaching the lowest level in nearly a month. The dollar index (DXY) reached an intraday low of 97.65, the lowest since Nov. 4. The greenback has declined 0.7% over the past three trading sessions.

DXY is on the cusp of knocking out a major support level, according to FXStreet analyst Pablo Piovano. In a Tuesday article, Piovano said the dollar index is approaching the critical 200-day simple moving average (SMA). A failure to hold the line could spell trouble for the world’s reserve currency.