Gold Hinged to US-China Trade Wars

26 Nov 2019

UK jewellers are keeping a close eye on the Brexit impact on the pound-dollar exchange rate, as gold’s fortunes remain tied to the US-China trade wars and the strength of the US economy, says David Brough.

October was the pound’s best month in over a decade as Prime Minister Boris Johnson’s deal with the EU reduced risks of a ‘no-deal’ Brexit.
As gold prices steadied, the stronger pound made restocking of dollar-denominated gold more affordable for UK jewellers in a year of very strong bullion prices, buoyed by three US rate cuts.
A climate of falling US interest rates increases the appeal to investors of holding non-yielding gold, and weighs on the dollar, making gold cheaper for those holding other currencies.

At the time of going to press, gold price rises in the near term appeared to be capped by progress in trade talks between the world’s two largest economies.

But any new souring of trade relations between the US and China could once more stoke a bullion rally.

The United States and China have slapped tariffs on each other’s goods in a dispute over China’s trade and industrial policies, eroding world economic growth.

China’s economic growth slowed more than expected to six per cent year-on-year in the third quarter, the slackest pace in almost 30 years.

ANZ Bank said in a note it expects gold to be supported by heightened macro and geopolitical risks.

Gold tends to act as a ‘safe haven’ investment in times of heightened global uncertainty.

Prospects for a global economic slowdown, or even recession, aggravated by the US-China trade wars, could give support to gold in the coming months, analysts say.

An unofficial poll taken at the London Bullion Market Association (LBMA) conference in Shenzhen, China, in October, put gold prices rising to $1,658 an ounce in a year’s time, underpinned by clouds gathering over the global economy.

Gold was down 0.24 per cent to $1,510.54 an ounce on 4th November.

In sterling terms, the cost of gold may be linked to how Nigel Farage’s Brexit party fares in the 12th December general election. The Conservative party is leading in the polls and the risk of a ‘hard’ Brexit is considered to be reduced, underpinning the pound against the dollar.

Among other precious metals, palladium now costs signi´Čücantly more than gold, dragging on demand for palladium in men’s wedding bands, jewellers say.

Independent jewellers are promoting sales of platinum wedding bands over gold in some cases, taking advantage of platinum’s discount to gold prices, while extolling the virtues of platinum as a jewellery metal.

Prices of the ‘big three’ coloured gemstones (rubies, sapphires and emeralds) face downward risks from increased output by medium- and large-scale miners, creating opportunities for retailers to boost margins of jewellery set with coloured gemstones.

Referring to large-scale mining of coloured gemstones, US gemmologist Richard Drucker, who produces the GemGuide showing gemstone price trends, told the Gem-A Conference in November: “We are in a period of overproduction where shareholder interest supersedes market interest.”

Disclaimer: Any views expressed in this column are those of the author and should not be seen as investment advice.

David Brough is IJL’s Precious Metals & Gems editor. He previously covered commodity markets, including precious metals, for Reuters and is editor and co-founder of JewelleryOutlook.com.

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