Will he or won’t he? Gold thinks he will...

Ole Hansen

Head of Commodity Strategy

Gold is trading back above $1,200/oz ahead of the expected announcement from the White House that China is about to get hit by additional tariffs on goods valued at up to $200 billion. The latest US trade balance for July showed the US in the red by $50.1 billion while the trade deficit with China rose to a fresh record of $36.8 billion.
Enlarge
XAUUSD (source: Saxo Bank)
With his domestic agenda being challenged by the upcoming midterm elections, less-than-flattering comments from White House insiders, and the ongoing Mueller investigation, President Trump is unlikely to step back from his fight with the Chinese.

The prospect of an escalated trade war continues to make matters worse for emerging market bonds, stocks and currencies. The MSCI emerging market stock index is down by almost 20% since January while the MSCI EM currency index has lost 8.5% of its value since April when the focus turned to trade tensions. 

While industrial metals have had a rough ride this week from the prospect of global growth and demand being negatively impacted we have seen gold continue to stabiliae. As a result of these developments the Gold-HG copper ratio touched a two-year high at 4.6 while silver at one point touched a two-decade low against gold after the gold-silver ratio reached 85. 
Enlarge
Source: Bloomberg, Saxo Bank
In the week to August 28, funds bought gold for the first time in 11 weeks. The 9,000-lot reduction of what was a record short, however, was still small compared with the 143,000 lots sold since June. We conclude, as mentioned in recent updates, that a bigger move is needed before short sellers start to worry. 

Funds are short gold in response to a stronger dollar, rising US interest rates, and the increased need to be invested where strong liquidity can offer a certain amount of protection. 

The US stock market and the dollar both tick that box and as long we do not see any contagion into the US market from the market turmoil seen elsewhere gold may struggle to find a bid strong enough to take it higher. However, a break above $1,220/oz as per the chart above is likely to attract some additional buying but whether it will be strong enough the get the short-covering wheel to accelerate remains to be seen.

You can access both of our platforms from a single Saxo account.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)