At its low the Dow Jones Industrial Average was down well over 900 points trading to a low of 25,523.38. Although it closed off of its lows the Dow lost 767.27 points today, which is a net decline of 2.90%, as it settled at 25,717.74. At the same time gold prices surged to the highest trading point over the last six years with December futures trading to a high of $1481.80. Currently gold futures are at $1476.00 which is a net increase of $18.50, gaining 1.27% on the day.
The tremendous upside swings in gold pricing is directly attributable to the current trade war between the United States and China. The dispute between the two superpowers has hit a new low point in negotiations and has created an extremely strong risk-off market sentiment causing U.S. stocks to plummet resulting in the largest single day decline this year.
The trade war hit a low last week when president Trump announced his intention to initiate a 10% tariff on the remaining $300 billion worth of Chinese imports to the United States effective September 1st. This 10% tariff could go as high as 25% over this next year according to Trump’s recent statements. On Thursday of last week Trump sent out a series of tweets to announce the initiation of additional tariffs. Since that point we have seen tremendous pressure on U.S. equities and a defined, strong rally in gold.
This news occurred in tandem with the Federal Reserve announcement of ¼% rate cut, which by many analysts was considered to be a hawkish cut. More importantly during the press conference by Jerome Powell last week he stated that he didn’t “see the move as the beginning of a lengthy cutting cycle.” That statement caused both gold and U.S. equities to trade lower. However, the statement by Trump had a completely different effect having a negative impact on equities and a bullish impact on gold pricing.
This was the turning point for gold which once again began to act as a safe haven asset in response to equities markets under pressure. Prior to this both gold and equities were running in tandem, with both asset classes gaining ground on the assumption of Federal Reserve interest rate cuts. While it was widely expected that the Fed would announce a rate cut of only ¼%, it was also expected that they would announce more rate cuts during this calendar year.
This week began with a tremendous drop in the Chinese yuan which depreciated close to the record low against the U.S. dollar which had a cascading impact on U.S. equities causing stocks to plummet. This in turn prompted gold prices to rally as market participants favored this safe haven asset as a protective asset class in light of the tremendous selling pressure in stocks.
Our current technical studies indicate that this rally could easily take gold pricing over $1500 per troy ounce for the first time since April 2013.
Wishing you as always, good trading,