Gold will Continue to Shine in Q2

Dubai, March 14: A host of factors affect the gold price benchmarks as the trading markets enter the second quarter, starting with the late economic cycle causing pain in global markets for the last six months. China’s intermittent economic weakness has undermined growth in global stocks and bonds, causing considerable volatility and uncertainty. As we all know, safe-haven buying becomes a priority when the economic wheel spins dangerously anywhere near the cliff of recession. The risk of sudden drop-offs and uncertainty in some asset classes like stocks and bonds means that investors are seeking hedges for their bets, and gold is often the hedge of choice.

In late February, Gold jumped to a 10-month high on a trampoline made of pockets of weakness in global stocks, lower-than-expected retail sales figures in the US for December, and ongoing trade talks between China and America.

Recently, positive messages have emerged from the negotiating teams and the premiers of the US and China, but over the first quarter investors clearly felt the uncertainty of the trade talks deadline at the end of first quarter and were concerned over the possibility of further pressure on global growth.

At the time of writing, US President Donald Trump tweeted that he would hold a meeting with President Xi Jingping, citing progress in the talks and saying he would delay further tariff hikes on imports from the Asian giant.

Following the pattern over the last six months, Asian stocks gained on the positive news, giving new impetus to risk appetite. Nonetheless, at least at this stage, gold retains its gains as investors hedge their newfound risk appetite with the non-yielding precious metal.

After being neutral on gold in 2018, I’m now slightly bullish. Other than China-US trade negotiations, there are other supporting factors suggesting gold could maintain a stronger course in the second quarter. Falling interest rates and a dovish Federal Reserve have taken the shine off US dollar-denominated asset classes like Treasuries which surged in 2018 on the back of regular rate hikes.

Other central banks like the ECB and BoE are taking their lead from the Federal Reserve and delaying plans to raise their key rates. Falling return expectations in affected asset classes are increasing gold’s attraction as a relatively safe bet amid an uncertain interest-rate environment.

Inflows into gold-backed ETFs appear to support this argument. January saw inflows into gold ETFs reaching the equivalent of $3.1 billion, bringing total holdings to 2013 highs, according to the World Gold Council. Hedge funds have inched towards a bullish position in 2019 compared to their bearish stance in 2018 as they eye the increasing chances of a hard Brexit and a falling dollar. I’m currently watching hedge fund positions, which I expect to begin accumulating long positions. $1,366 is a strong resistance level; if it were to break, we could see further gains above $1,400.

In conclusion, risk appetite is threatened by two major factors – further weakness in the global economy and a difficult Brexit course. While gold has regained much of its standing as a safe-haven asset so far in 2019, investors could also keep in mind that if there is a trade deal between the world’s two largest economies there could be better times ahead for global growth. Having said that, there appears to be little doubt that Brexit issues will continue to cloud the horizon for growth in Europe, meaning that gold still has some scope for additional safe-haven buying even in the best-case scenario for bilateral trade talks between the US and China.