While US Federal Reserve Chairman Jerome Powell recently attempted to tread carefully between announcing an expected downturn in the US economy in 2019 without edging closer to panic mode, the markets have reacted negatively to Powell’s announcement and the Fed’s decision to instigate a modest rise in interest rates – the fourth such time this year that the Fed has hiked the benchmark overnight lending rate. Simultaneous to this, without any positive news development on the trade war front in the aftermath of the Trump-Xi meeting at the G20 Summit in Argentina, investors are flocking away from stocks and bonds and towards the traditional safe haven of gold.
In general, increased gold prices tend to mirror a lack of confidence in US stocks and bonds. While the current Fed chairman is far more monetarily conservative than his two inflation creating predecessors, his steady hand may not be enough to keep Dollar inflation low while the speculative nature of Fed decisions themselves tend to often take the form of self-fulfilling prophecies, not least because markets often over-react, rather than react rationally to the Fed’s forecasts.
According to a new report from Bloomberg financial news:
“Gold is rallying into the end of 2018 as turmoil in global equities, the partial U.S. government shutdown and concerns about the outlook for next year stoke demand, lifting prices to the highest in six months.Bullion climbed as much as 0.5 percent on Wednesday, extending last week’s gain and on course for the biggest monthly advance since January 2017. Money managers are the most bullish on prices they’ve been in half a year”.
The report further states,
“Holdings in gold-backed exchange-traded funds have ballooned as shares fell, and investors priced in expectations for fewer U.S. interest rate rises in 2019. They hit 2,187.2 tons on Dec. 25, up more than 100 tons since mid-October”.
As October was when US stocks began the negative trend that has likewise gripped December trading, it is no surprise that as sure as every action produces an equal and opposite reaction, those fleeing stocks and bonds are retreating into gold, silver and the precious medal palladium.
And yet while Trump continues to wage a rhetorical war on the Fed and its chairman, the reality is that short of radically changing the US monetary system (something that would take years if not a decade to accomplish), Trump’s best and in many ways his only weapon that he could use to stem the tide of economic downturn revolves around the trade war.
China is currently opening its markets to the rest of the world in a more substantial way than at any time in the history of the PRC. This is true in respect of imports as well as foreign direct investment. Naturally, American businesses are angry about missing out on this golden opportunity that is being enjoyed by companies from throughout Asia and Europe. And yet, a stroke of Trump’s pen could change all this by ending the trade war, accepting that China wants to buy more US goods than ever before while Trump also must accept that US businesses need Chinese imports, US farmers and industrial producers need China’s vast market and US consumers are being hit with inflation by stealth due to the regressive taxation that tariffs represent. If Trump were to accept all of these crucial factors as the motivating impetus for an urgent end to the trade war, 2019’s first quarter fortunes could in fact be comparatively resuscitated before bad trends solidify. At the same time, as Chinese experts predict that 2019 will see the further un-coupling of Chinese stocks from trends on Wall Street, many US investors fleeing Wall Street could flock not only to precious metal markets but to Shanghai.
The necessary correcting of overheated US stocks is still far from over and it is therefore likely that a rush to gold will likely continue into the first quarter of 2019. Unless the trade war is resolved soon, the US dollar could follow stocks and bonds into dangerous territory despite the efforts of the Fed to keep a handle on inflation.