Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM
Gold gained considerably more shine on the back of recession fears in the last few trading days of the year. As of December 21, Gold futures had risen to three-month highs, buoyed by safe-haven buying as global investors turned their back on risk.
A rising Gold price often comes down to one of two major commodity market drivers: geopolitical pressures or economic pressures. In the current scenario, both pressures are alive and present. Geopolitical pressures are causing stormy trading weather in Europe, Asia, and North America. The threat of a no-deal Brexit in Europe has supported the Gold price since 2016 and the long-tail effect still prevails over two years later. Adding to the overall uneasy trading environment are high levels of uncertainty over what happens after the end of the 90-days trade truce between the world’s two most powerful economies: the US and China.
Economic pressures are no less urgent than the geopolitical ones. Gold has already gained higher ground on the back of global economic slowdown fears which are threatening to erupt into recessionary investor behavior. The stock markets in China and the US have been heavily hit by risk-averse animal spirits. Loss of confidence, profit-taking, rapid sell-offs, avoiding risk and other similar behaviors can actually add to the chances of a recession hitting one of the world’s major economies.
A hard look at the economic fundamentals doesn’t seem to support these fears. For the time being, China’s economy is slowing down and is expected to reach 6.2 percent in 2019, according to the World Bank. So, there’s a long way to go until a recession can be declared in China. The economic fundamentals in the US are still relatively sound considering the 3.4 percent GDP growth in Q3. Nonetheless, it wouldn’t be the first time that animal spirits triggered an economic downturn.
The Federal Reserve hasn’t been able to contain the market’s recession fears with its latest equivocal stance on interest rates. Neither hawkish nor dovish, the Fed is expected to raise interest rates 2-3 times in 2019 which would likely weaken the USD and possibly support Gold.
A complex picture is developing for the first quarter of 2019 amid a prevailing mood of uncertainty and risk aversion. It’s possible that only two things could calm the animal spirits and turn around the threat of further volatility in the financial markets. The first is achieving a trade deal between the US and China in March to ease geopolitical trade tensions. And the second is positive economic data from both countries to reinvigorate investment. Still, the equity markets are extremely close to a tipping point into absolute pessimism and they are powerful influencers over the economy so the window of opportunity is quite narrow. If things don’t go well in March 2019 at the end of the temporary trade truce window, Gold may continue to see support in the medium term because geopolitical and economic pressures will likely redouble in China and the US.
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