Gold surges above $3,300 as trade tensions continue to ramp

OUTSIDE MARKET DEVELOPMENTS: Trade tensions between the U.S. and China continue to escalate, sapping risk appetite once again. The White House announced that China now faces tariffs up to 245% "as a result of its retaliatory actions."

When retaliation begets retaliation, you've got yourself a trade war. However, China surprisingly appointed a new lead trade negotiator today. Li Chenggang was China's assistant commerce minister during Trump's first term and may have been inserted to help dial down the tensions.

Beijing has signalled that it is open to trade talks. A Bloomberg article said that China requires that the Trump administration first show more respect, have a more consistent position, and appoint a point person for those talks. Two of the three seem antithetical to the preferred tactics of the Trump administration.

Citing "pervasive uncertainty," The Bank of Canada held steady on rates today. "The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations," according to the policy statement.

As central banks continue to evaluate the impact of tariffs, risks to both growth and prices are evident. Nonetheless, the market still expects a 25 bps cut from the ECB on Thursday, although it seems it could be a closer call than many are anticipating.

Fed Chairman Powell will speak to the Economic Club of Chicago later today. It seems unlikely that any of his comments on the policy path will deviate from the 'wait-and-see' tack.

That being said, the Fed remains on an easing path, and the market believes it will continue. Fed funds futures are pricing in 87 bps of cuts by year-end, with the first 25 bps cut likely to come in July.  

MBA Mortgage Applications fell 8.5% in the week ended 11-Apr as the 30-year mortgage rate jumped to a seven-month high of 6.81%. Purchases fell 4.9%, while refis plunged 12.4%.

Retail Sales surged 1.4% in March, in line with expectations, versus +0.2% in February. Ex-auto +0.5% on expectations of +0.4%, versus a revised +0.7% in February (was +0.3%). Auto and parts sales were especially strong at +5.3% as consumers front-ran potential tariffs.

Industrial Production fell 0.3% in March on expectations of -0.2%, versus a revised +0.8% in February (was +0.7%). Capacity utilization fell to 77.8% from 78.2% in February.

NAHB Housing Market Index rose one point to 40 in April from 39 in March. The future sales index fell 4 points to 43, versus 47 in March.


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CST: +$74.61 (+2.31%)
5-Day Change: +$232.19 (+7.54%)
YTD Range: $2,607.16 - $3,315.65
52-Week Range: $2,281.97 - $3,315.65
Weighted Alpha: +45.88

Gold surged to new record highs above $3,300 on the latest escalation of trade tensions between the U.S. and China, even as there was some glimmer of hope for bilateral trade talks between the two largest economies. Persistent weakness in the dollar and expectations for an ECB rate cut tomorrow provided additional lift for the yellow metal.



The next big round number is $3,400, but the breach of the $3,290.11 Fibonacci objective shifts focus to $3,493.00 (261.8% retracement of the last meaningful correction). That would bring gold within striking distance of the often-mentioned $3,500 target.

With each new high, $4,000 gold is looking increasingly attractive. Gold is already up more than 27% YTD. Does it have an additional 20% rise in it this year? 

It wouldn't be unprecedented. Gold's largest annual percentage gain was 74%. This occurred in 1979 as investors sought shelter from surging inflation and geopolitical tensions.

Arguably, recent weeks of trade turmoil are further incentive for de-dollarization, which should perpetuate robust official sector gold demand. China, in particular, appears to be eschewing dollars and Treasuries as reserve assets, but they certainly aren't alone.

UK export data reveals that China bought 50 tonnes of gold from Britain in February. Societe Generale estimates that a "staggering" 700 metric tons have now been brought into China over the past two years, according to a Reuters article by Mike Dolan.

"The rotation from U.S. Treasuries into gold seems like something we can loosely correlate and somewhat keep track of – and the selling of Treasuries matching that of gold exports to China is something we can't help but take notice of."

If China plans to swap Treasuries for gold, they have a lot more ammo to use that could fuel the rally for some time to come. However, long gold is now the most crowded trade, supplanting the 'magnificent-seven' tech stocks.

That comes as gold once again proved itself to be an excellent hedge in times of stock market volatility. Investors have taken notice and are reallocating accordingly.

Silver traded briefly with a 33-handle for the first time in nearly two weeks. The white metal is being dragged higher by the latest record highs in gold, rebounding copper, and a weak dollar.



As gold soars out of reach for some investors, silver is frequently viewed as a less expensive safe-haven alternative. Those investors must keep in mind that silver is primarily an industrial metal and is a much smaller, more thinly traded market than the gold market.

The volatility seen in the last two weeks alone is indicative of silver's higher beta. Gold is a far superior haven.

With silver back above the 50- and 20-day moving averages, confidence continues to swing back in favor of the bull camp. A breach of the $33.264 Fibonacci level (78.6% retracement of the recent plunge) would bode well for tests back above $34, with potential to the 28-Mar high at $34.543. At that point, the 22-year high from October at $34.853 would also be in play.

The aforementioned MAs now mark first support at $32.539/527. Below that, the highs from earlier in the week at $32.368/382 bolster today's Asian low at $32.276.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
312-549-9986 Direct/Text
[email protected]
www.zanermetals.com

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.