Gold prices continue to drift higher in the face of increasing global geopolitical and economic uncertainty. This stability comes on the back of worsening economic data from China, the United States/China trade war, and the dovish tone set by the Fed. This combination of factors has bolstered gold’s position as an attractive safe haven asset. Investors are piling into it to provide safety in a time of market turmoil.
In short term, market is apparently looking at a key support zone for gold at $3,250 – $3,300 per ounce. This increase is especially welcome news given the continued turn for the worse in Chinese economic data. Meanwhile, the trade negotiations continue to stumble ahead with no end in sight. A new Federal Reserve rate cut increases gold’s appeal. When monetary policy is more accommodative, that tends to increase investment in precious metals.
Economic Weakness in China
This comes as recent economic indicators from China have rattled markets with signals that the world’s second-largest economy may be weakening. In August, industrial production increased at an annualized 5.2%, down from 5.7% in July. These numbers have investors up in arms. These analysts argue that Chinese authorities will have to deliver additional policy support to raise growth.
China’s increasingly wobbly economic backdrop does a number on their own markets. It’s a law that shapes our overall global trading relationships as well. Amid continued U.S.-China trade negotiations, including talks as recently as the end of June in Madrid, little to no progress has been made. The turtle-paced progress has created excessive additional uncertainty on the international stage. Consequently, investors are fleeing to safety—and gold has been a primary destination.
As the Chinese economy continues to face these headwinds, markets have been anticipating additional stimulus moves. Analysts have said such actions would likely inflate gold prices. The subsequent surge in demand for safe-haven assets often occurs during periods of economic turmoil.
Federal Reserve Outlook and Interest Rate Expectations
The Federal Reserve’s position on interest rates is perhaps the most important factor in determining gold prices. As things stand, analysts are almost universally expecting a 25-basis-point rate cut at that meeting on policy day. Expectations of a dovish Fed tend to rally gold. When interest rates are low, they reduce the opportunity cost of holding non-yielding assets such as gold.
Gold prices have skyrocketed in reaction to this predicted scenario. By the start of September, they blasted through the upper channel’s ceiling at around $3,450, marking a strong bullish continuation point. Gold remains well-supported at 3,520. Therefore, it is important for it to remain above this line to validate the breakout and keep its bullish movement going.
As shown by recent bullish market sentiment, gold is poised to climb even higher. The next major technical target to keep an eye on is the $4,000 barrier. Given the implications for private investment, investors are understandably laser-focused on any moves from the Federal Reserve that might affect this future trajectory.
Ongoing Trade Tensions and Market Reactions
The uncertainties of the U.S.-China trade relationship remain a strong undercurrent to market sentiment. Despite ongoing negotiations, significant breakthroughs remain elusive. Negotiations are set to go on at least through mid-week. At the same time, the common thread among market participants continues to be worry about trade policies and their effects on future economic expansion.
All of these unresolved tensions help explain why interest in gold as a geopolitical hedging instrument remains elevated. The combination of domestic economic challenges in China and international trade disputes has made gold an attractive option for risk-averse investors seeking stability in uncertain times.
Gold has remained stable during recent turbulence. After a short-term consolidation period during August, it blasted back up, an answer to increasing investor confidence in gold’s safe-haven properties. The bottom edge of the channel has acted as a powerful support area for gold prices. It has done a good job of maintaining the $3,250-$3,300 area providing a cushion against future drop.