In the wake of breaking news that the United States had formally labeled China a “currency manipulator” and China had retaliated by dropping the price of its currency to a near-historic low, gold prices skyrocketed the night of August 5, 2019.
Even after the upward momentum stabilized the next morning, gold bulls gleefully noted the yellow metal had hit another six-year high overnight.
With Asian and European markets volatile and the U.S. stock indexes positioned to open higher the next morning, gold buyers had eased up on activity somewhat as the trading day began.
However, gold and silver futures prices remained high, and gold itself continued to trade strongly as analysts began predicting another Fed rate cut in response to economic tensions from the U.S.-China trade war.
“No doubt about it: We witness the two largest economies in the world in full economic, trade, currency war and this gets worse before it stabilizes,” said David Kotok, chairman and chief investment officer at Cumberland Advisors.
He went on to warn, “Recession risk rising.”
While none of that is necessarily good news for the markets or even the average investor, it is great news for gold bulls who believe owning the precious metal is the ideal way to hedge against economic downturns.
With China and the U.S. both leveling tariffs against each other as the U.S. seeks assistance from the International Monetary Fund (IMF) in terms of regulating China’s currency practices, market volatility is likely to remain firmly entrenched as “the norm” for now.
“If I had money in the bank, I would sell the dollars and use that money to buy gold,” said futures strategist Phillip Streible of the current situation.
“You are divesting yourself from your currency by selling it and buying a hard asset,” he described the strategy, adding, “People are concerned.”
This morning, Jim Wyckoff, creator of Wyckoff’s Market Rating System, rated the current gold market an 8.5 out of 10, with 10 being the most bullish market rating possible.
Wyckoff himself notes that any rating in excess of an 8 does indicate that the market is potentially volatile.
Perhaps the factor most likely to slow the currency conflict angle of the ongoing U.S.-China trade wars is Chinese capital flight, which has been an ongoing issue for the country for decades.
However, even this is unlikely to have an immediate effect on the present economic environment because the current Chinese economic five-year plan has specific groundwork in place to prevent much of the capital flight that took place in previous decades.
During that time, Chinese investors sank millions of dollars into investment vehicles abroad.
The current regulations mean any incentive to reduce pressure on the U.S. government to retract tariffs and trade practices would likely be delayed, keeping the markets volatile in the interim.
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