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Gold hits six-year highs amid growing political and economic turmoil

Last week, amid political fear and economic turmoil across Argentina, Russia and Hong Kong, the price of gold in dollars reached fresh six-year highs.  Continued political protests in Hong Kong and Russia, as well as the results of Argentina’s primary elections,  are fueling global sentiment for risk reduction. This growing shift towards de-risking pushed gold to $1,535 per ounce on August 13th.

The political crisis in Hong Kong is now entering its 12th week as protests continue to grow.  The escalating political crisis is now becoming an economic crisis.  On August 12th, protestors brought the Hong Kong airport to a standstill.  Investors and business leaders are concerned by the economic fallout from nearly 3 months of political turmoil.

There are growing signs that Hong Kong’s economy is headed for a recession, as political unrest combines with the U.S.-China trade war to depress retail sales and devalue the $4.9 trillion local stock market.  Signs of a recession are already emerging as the MSCI Hong Kong Index has now de-coupled from the US S&P 500.

There is fear that Hong Kong’s status as a stable and reliable commercial center will face irreparable damage.   This would be devastating for an economy established upon its pro-business reputation for safety.   Hong Kong has leveraged its sterling reputation to become the primary commercial gateway to China.  If Beijing intervenes, particularly with the use of military force,  it would immediately undermine Hong Kong’s status as a world financial center.

Global macro-dynamics appear to have decisively changed in gold’s favor, both in terms of US trade policy and global monetary policy that favors negative interest rates. The trade war, economic growth headwinds, and accommodative monetary policies have become increasingly supportive of safe-haven assets such as gold.

Not surprisingly, expectations regarding US trade policy have been a significant driver of recent increased gold value.  Key to this has been the dramatic escalation in trade tensions between the US and China.   At the beginning of August, President Donald Trump suggested additional tariffs on imports from China which served as a catalyst to drive gold from $1,400 to last week’s peak above $1,500.

Earlier this month the US announced its intention to impose a 10% duty on an additional $300bn worth of Chinese imports, as of September 1st.   Chinese authorities responded by allowing the yuan to move past Rmb7.00/$ for the first time since 2008, which in turn saw the US Treasury declare China a “currency manipulator.”  As if this wasn’t bad enough, the US trade war could widen to include new US measures against EU exports.

Against this backdrop of an escalating trade war, market expectations suggest a high probability of another rate cut by the Fed in September. Despite the Fed’s restrained comments at the last FOMC meeting, markets are currently pricing in up to three more interest rate cuts this year, and at least one more in the first half of 2020.

The ECB is also likely to announce further stimulus measures at its next meeting. US 10-year yield has fallen to its lowest since 2016, while German yields continue to move deeper into negative territory. This, in turn, has driven up the stock of negatively yielding debt, which is also supportive of higher investor inflows into gold.

Loose US monetary policy and the impact of trade wars on the global economy are not alone in boosting gold’s appeal to investors.  Low growth across much of the Eurozone and concerns over mounting Chinese debt should encourage interest in defensive assets. These macroeconomic conditions will only further gold’s rise.