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Published on 9/05/2018 3:53:37 PM | Source: Quantum Mutual Fund

Gold continued its wild ride as news flowing on trade issues between the U.S. and China contributed to volatility - Quantum Mutual Fund

GOLD OUTLOOK By CHIRAG MEHTA Senior Fund Manager - Alternative Investments Quantum Gold Fund, Quantum Gold Savings Fund, Quantum Multi Asset Fund & Quantum Equity Fund of Funds.

Earlier this year a raft of concerns kept gold prices afloat, factors like uncertainty over U.S. sanctions or concerns about U.S.-China trade tariffs or the Middle East conflict. With Trump taking a relatively softer stance on these issues, these geopolitical events were either subsiding or concluding. De-escalation in the geopolitical tensions coupled with the strength in U.S dollar and rising bond yields ensured a decline in gold prices. All in all, gold managed a close at $1315.35 an ounce, a decrease of -0.7% for the month.

Gold continued its wild ride as news flowing on trade issues between the U.S. and China contributed to volatility. An escalating trade war could hamper the so called synchronized global economic momentum. At least for now, a softer approach from both sides has led to de-escalation of tensions. However, it’s far from over. Geopolitical risks of importance are the Iran nuclear deal and U.S.-China trade spat. As U.S. decides to pull out the Iran deal, the pressure of additional sanctions could now lead Iran towards building or reinvigorating its nuclear weapons program.

With the threat of further global discord based on these geopolitical hotspots subsiding, markets have shifted their focus to economic data and monetary policy. The US Dollar Index is trading to the highest level since in nearly two months and 10 year Treasury yields is at the highest level since 2014. It’s the dollar story which received a boost mainly because of the Euro. The ECB statements indicated that all is not well in Eurozone and the monetary policy accommodation will be in place for much longer as opposed to markets expectations for earlier withdrawal. U.S economic data has not been robust, and the rise of each the Dollar and Treasury yields has been due to the weakening Euro and cooling of geopolitical tensions; weighing down Gold prices.

Outlook

The US Federal Reserve in its recently held monetary policy left benchmark interest rates unchanged and maintained their projected pace to raise rates two more times this year. The statement said that Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term. The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the Federal funds rate. These statements suggested that the Federal Reserve continues to be accommodative.

The Federal Reserve is on course to shrink its balance sheet by US$420 Bn or 9.4% this year and by US$600 Bn next year as a result of the policy known as quantitative tightening. Meanwhile, G7 (a group consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) balance sheets are still expanding in aggregate; though the rate of expansion will slow sharply this year, most particularly in the second half, based on the “tapering” schedule outlined by the ECB. The aggregate size of the balance sheets of the Fed, the Bank of Japan, the ECB and the Bank of England increased by 17% last year to US$15.2 Tn at the end of 2017. Based on the stated central bank policies, the aggregate balance sheet is projected to rise by 6.8% to US$16.3 Tn by the end of this year.

The impact of lesser money will be over time felt by equity markets and the euphoria on tax cut optimism, liquidity and higher asset prices will likely come to an end this year. The revised tax tables for 2018 have not really started to have a big effect yet on the federal tax receipts, but in the months ahead we can expect that factor to start bending the receipts line lower, and thus the deficit line raising. Higher deficits have been historically been bullish for gold prices.

US Fed’s balance sheet normalization would push rates higher and therefore impact its own resolve for rate hike trajectory they envision today, as high rates brings in focus the prevailing high debt levels. Absent support from global turmoil due to trade wars or geopolitical concerns, Feds attempt to get ahead of its QE unwind may provide investors with a buying opportunity in gold before adversely impacting market and economy. While the upside may take some time, downside seems limited because the negative fundamentals for the market are for the most part already factored into prices.

The trade war dispute between the two superpowers (US & China) is far from over. It is hard to imagine that either of the two will back down immediately which suggests that this dispute will continue. A trade war could affect demand for U.S. assets just as the budget deficit swells, leaving the dollar vulnerable should international buyers shun U.S debt. The aggregate federal, state and local debt in the U.S., both on balance sheet and entitlements, relative to levels of savings and investments in the economy, will contribute to worries over the longer-term purchasing power of the dollar, particularly in view of low current yields. Should there be a “deep trade war,” with complications for global growth, industrial commodities such as base metals, energy will be negatively affected, but that scenario would benefit gold.

The world continues to remain in state of great disequilibrium, both with respect to the global economy and geopolitics as well. Given the macroeconomic picture, gold will be a useful portfolio diversification tool and thereby helping you to reduce overall portfolio risk.


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