Risk On, Risk Off

There are opposing and opposite forces currently at play affecting gold prices.

U.S. equities continue to rage to the upside, with the NASDAQ closing at a new all-time high for the third consecutive day and the Dow back above 25,000. This risk-on market sentiment coupled with recent dollar strength has put significant pressure on the precious metals complex including gold.

At the same time, there are genuine geopolitical concerns that could, in fact, result in a flight to safe-haven assets such as gold. The current trade dispute between the United States and China have continued to be at an impasse after last week’s discussion yielded no forward movement.

In an interview with MarketWatch, Naeem Aslam, an analyst with ThinkMarkets, said, “Global trade war is the only factor providing the support for the gold price. Retaliation was the very act which traders had in their mind, a direct consequence of Trump’s action.”

In addition to the China U.S. dispute is the upcoming G7 nations which will hold talks on Friday and Saturday. It is highly likely that tariffs and trade will be high on the list of topics to discuss. The current plan by the president to implement tariffs will undoubtedly add friction to the discussion.

Lastly, there is still geopolitical concern about the proposed summit between the United States and North Korea on June 12. This summit is certainly a wildcard in that the outcome is an unknown. Given the vast chasm between the United States and North Korea, the likelihood of a successful outcome is still remote.

As reported in MarketWatch, Lukeman Otunga, research analyst at FXTM, said, “Although global trade fears remain a dominant market theme, the yellow metal clearly needs a fresh catalyst to accelerate the flight to safety. This much-needed catalyst could come in the form of [U.S. President] Donald Trump if he creates chaos and uncertainty during the summit.”

As long as the U.S. economy continues to be robust, resulting in new record highs in our equities markets, liquidity theory dictates that investment dollars will continue to flow to that asset class. At the same time, the above-mentioned geopolitical concerns could at any point ignite real fears affecting the U.S. economy, equities, and the risk-on asset class.

For now we have both opposing forces at play, which are currently favoring the asset class which has been gaining the most value: risk-on.

Wishing you as always, good trading,