Gold to Take Spotlight As Trade War Escalates

Bank of America analysts say gold could reach $1,400 this year as trade war conflict progresses.

gold winner of trade war

With ongoing escalations in the trade war between the U.S. and China, Bank of America Merrill Lynch (BoA) believes that risk-averse investments will soon be taking the spotlight. Although disputes between Washington and Beijing over import tariffs in their respective countries have been going on for years, Kitco reports that investors have, thus far, largely ignored the grave risk that the animosity presents.

In May, however, it became apparent that neither country will reach a satisfactory trade agreement, curbing enthusiasm that the U.S.-China standoff would come to a peaceful resolution. Since then, gold has slowly crept up to most recently post its best weekly performance in over a year.

According to a recent article on Kitco, pundits have previously noted that gold prices remained timid even during tensions, likely owing to investors’ hopes of successful negotiations. May’s fallout appears to have been the catalyst, and investors are becoming rapidly aware of the warning signals coming from the scuffle.

BoA’s analysts concur, explaining that the effects of the now-official trade war are already being felt. Earlier this month, the bank downgraded their U.S. GDP growth forecast for 2019 from 2.5% to 2.4%. The bank expects growth to fall even more sharply next year, as they sliced their GDP expectations for 2020 to 1.8%, down from a previous estimate of 1.5%.

The bearish outlook of the bank appears to be shared by the Federal Reserve, given their recent turn from hawkish to dovish. In the absence of loose fiscal policies to support the economy, which would likewise support gold heavily, BoA’s analysts see the Fed being forced to cut interest rates three times between now and early 2020, amounting to a reduction of 75 basis points in the Federal funds rate. Besides telling investors that trouble is brewing, Kitco writes the rate cuts will also weaken the already-flimsy Treasuries and create a dearth of safe-haven options.

In regards to risks, the bank explained that the continued increases in U.S. tariffs are unprecedented and pose a major risk to the global economy. The average tariffs on all imported goods are now at 4.4%, the highest since 1973, and a continuation of the trend could soon bring the figure to 13.8%, the highest since 1943.

Analysts have pondered how China will react to their economic slowdown besides introducing tariffs of their own. According to Kitco, China is a major creditor to the U.S., owning as much as $1.13 trillion of U.S. bonds. Dumping some or all of them to boost the Chinese economy would quickly send the U.S. economy into shock and threaten a major crisis.

The trade war also has plenty of implications for the global economy, as the two countries represent two of the world’s biggest economic powerhouses. BoA noted that the trade war could not only lead to global quantitative easing, but also pour over into a currency war involving the greenback and the yuan.

All this spells good news for gold, which has most recently clocked in just short of $1,340 an ounce. The metal has steadily trickled up over the past week, and BoA’s analysts see gold reaching $1,400 this year as the conflict progresses.