Gold prices recorded their biggest one-day decline in a year after it appeared that the US-China trade war could be heading for a truce. Donald Trump and Xi Jinping have agreed to resume trade negotiations between the two countries, triggering a sell-off in the price of the yellow metal.
The safe-haven asset gets a punch in the gut
Spot prices of gold fell 1.8% to $1,384.06 per ounce as per Indian financial daily newspaper Livemint, beginning July on a bad note. The yellow metal — considered to be a safe-haven asset — had shot up 8% in June and had clocked a six-year high of $1,439.21 an ounce on June 25 on the back of rising tensions between the two countries.
As is usually seen during times of global economic uncertainty, investors rushed to buy gold to protect capital and bid up the price of the commodity. Analysts warned of an impending stock market crash thanks to the protracted US-China trade war that has threatened to derail the economic growth of both countries.
The Politico reports that Trump’s trade war on China could cost each American household $2,000 in extra taxes. Also, US firms have been prohibited to get into business with Chinese telecom giant Huawei, and they have been pleading the Trump administration to lift the ban.
All of this has the potential to severely dent the US economy in multiple ways. While higher taxation would limit the spending power of households and reduce discretionary spending, US tech firms with reliance on China could end up reporting weak earnings numbers this season.
Not surprisingly, the stock market was running the risk of getting beat up and investors fled to gold for their safety. But now that trade talks are about to resume, investors could think of moving money back into stocks and dumping gold, sending the price of yellow metal below the $1,400 an ounce mark.
But it might be too early to dump gold in favor of stocks as the price of the safe-haven asset could a shot in the arm very soon.
Another gold price catalyst could be on the way
The market will now turn its attention toward US jobs data that due this Friday, which will play an important role in deciding if the central bank lowers the interest rate at its July meeting.
Nonfarm payrolls for the month of May had increased by just 75,000, which was far below the estimated job additions of 180,000. The job count for both March and April was also lowered substantially.
The tepid numbers left open the door for a potential interest rate cut, with some of the Fed officials believing that a rate cut could be in the cards thanks to a combination of several factors. Reuters reports that consumer spending in the US grew moderately while prices increased by a small margin. This is indicating toward inflationary pressures and a slowdown in economic growth.
If the Fed actually cuts the interest rate, expect gold prices to rally once again thanks to the perceived negative correlation between the two. Lower interest rates will give investors reason to move their money out of fixed income investments such as bonds into gold, sending the price of the yellow metal higher.
So don’t be surprised to see gold prices resume their journey north once again if the US jobs data turns out to be a dampener.
Last modified: September 23, 2020 12:48 PM