President Trump's soundbite earlier this week that he would consider holding off on any trade deal with China until after the election caught the markets off guard and renewed interest in defensive and safe haven trades.
The price of gold shot up past the $1480 level but is now settling back into the $1470s on more, you guessed it, trade optimism!
The immediate question is which side of the trade coin should be believed? The notion that a phase 1 deal is imminent or that an agreement could be a year away? I don't think some sort of compromise will only come after Election Day but I do think a meaningful one won't come until 2020.
The fact that Trump has been ratcheting up tariffs on Brazil, Argentina and France (and likely the U.K. next since they're implementing their own digital tax) suggests he's willing to make things worse before they get better. China's disappointment with the Hong Kong bill is well-documented and puts an increased unlikelihood on a trade agreement. In short, all the evidence suggests that the relationship is more adversarial than cordial.
Throw in an economy that is propped up by billions in Fed stimulus and is still managing to slow makes defensive trades a good bet for 2020.
Gold Could Be A Top Performer In 2020
Looking ahead to 2020, I believe that we're going to see the dollar retreat off of recent highs and pass back through the 95 level before making an eventual run towards 90.
The key to watch here is that downward trending channel that's heading into the $1400-$1450 range. If gold is able to move to $1500 and hold, the trend could be broken and gold could stabilize. More than likely, however, I think the White House is going to realize the potential repercussions of failing to do something by the December 15th deadline. My guess is that there is largely insignificant agreement made that's going to move investors to buy risk assets again at the expense of gold and Treasuries.
That likely keeps downward pressure intact and, if that occurs, provides little support until we get well into the $1300s.
The first support hits around $1360, the level gold peaked at in 2016 and again in 2018. From there, it's down to $1350, where gold peaked at twice in 2019 before its big summer rally. If it breaks through that level, the price could move all the way down towards $1310.
Much of this move would be based on short-term sentiment. The Fed continues to support the market with "not QE" and December tends to be a month where stocks generally drift higher (2018 being one of the big exceptions to the rule).
I think gold begins turning back north sometime in the first half of 2020 as the further drag-on of the trade war and another quarter of likely weaker data motivates investors to turn defensive resulting in a pullback in equity prices and an increase in gold and Treasuries.
Watch that current down channel for moves outside of those trendlines. It likely confirms that short-term direction of gold and where it moves headed into the new year.
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