Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM
Investors and multi-national trading companies have all experienced first-hand what happens when fear arises that the China economy faces the risk of a slowdown. In the aftermath of high-profile trade negotiations and tariff impositions between the US and China in the last half of 2018, multiple reactions rippled out into the international markets, one of which was an anemic risk appetite and increased attraction for safe-haven asset classes like Gold.
The precious metal appreciated in the first quarter, gliding past the psychological resistance level of $1300 on the back of cautious investor sentiment. In general, Gold prices benefited from the uncertainty over global growth and the Federal Reserve’s pause on US interest rate hikes. The World Bank’s precious metals index rose sharply by six percent in the first quarter compared to the three months prior, underscoring a prevailingly cautious investor mood which favored hedging bets with Gold-backed asset classes.
The upbeat trend appears to have reversed for Gold going into the second quarter when China announced better-than-expected growth results for Q1. Since March 25, the precious metal has declined significantly, reflecting a healthier risk appetite.
Other factors also contributed to the risk-on mood. Along with a better China GDP reading, we’re seeing stronger global stock markets, especially in the US, and higher Oil prices. The overall effect of more positive drivers has reduced demand for safe-havens asset classes.
Gold’s reversal of fortunes still largely depends on world growth expectations and GDP results in the larger economies. The yellow metal still has the potential to resume its upward trajectory if there are signs of weakening in the US economy and any further trade disputes. A typical driver of Gold prices is geopolitical developments. US sanctions on Iran might accelerate investor fears and drive Gold prices up in the short term, but in my opinion this issue has already been largely priced into investor risk calculations. For the time being, the markets are riding on more optimistic sentiment fueled by China’s renewed strength.
At the time of writing, there’s a fine balance between the bullish and bearish scenarios. Looking ahead, I would keep an eye on the World Bank’s 2019 forecast of 2.6 percent growth for precious metals this year. Demand for physical Gold remains robust and the Federal Reserve’s pause on interest rates serves to undermine the USD and support Gold prices. Any signs of economic global strength would count against the Gold bulls, limiting the precious metal’s chances of returning to the $1300 mark. The bearish scenario for Gold may continue in the second quarter, in which case, sustained weakness below $1280 will pave the way to further downside towards $1260.
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