The global geo-political atmosphere is heating up. Just a few days back, a US surveillance drone was downed near the Iranian border. In retaliation, the US ordered strikes against Iranian strategic targets but Trump called them off at the last minute. This was enough to send war jitters across the globe and made investors flock towards safe haven assets.
On the other front, the trade talks between the US and China continue to yield little progress fuelling the already high uncertainty when it comes to negotiations between the two countries. Neither the US nor China seem to be in a mood to back off anytime soon especially with the stance the US has taken on ejecting Huawei out of the US market and refusing to take back the tariffs imposed on Chinese goods.
The result was a six year high for gold which saw the precious commodity hit the $1439 mark for the first time since May-2013 according to Bloomberg data. However, geo-political uncertainty is not the only angle at play when it comes to the surge in gold prices.
Gold is also impacted by interest rates because any rise in the Federal Reserve’s policy rate means the US dollar is likely to get strengthened which means more expensive gold prices in foreign denominated currencies.
However, the recent dovish stance by the Fed has resulted in fall in the greenback which fell to a three month low. A potential cut in interest rates has also resulted in falling US bond yields. This means that gold has become more attractive as a safe-haven given the rising opportunity cost for investors on the back of a weakened dollar and low yields on bonds.
Last year JP Morgan Commodities Research forecasted the 2019 to be bullish for gold with an outlook of $1,294 in 2019 and $1460 in 2020. However, gold looks set to surpass even the 2020 target as the geo-political situation deteriorates rapidly and the central banks take more dovish stances. According to Bloomberg investors are going long on gold backed exchange traded funds (ETFs) and increasing positions in US gold futures and options.
This means investors are preparing for the worst and are hedging their bets on the global geo-political outlook. Expect the precious metal to glitter some more especially if the US-China trade talks deteriorate further and the US ups its war rhetoric on Iran further.