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Is The Gold Rally Sustainable?

Gold

After a dire start to 2018, gold prices have climbed sharply over the past six months and now hover around 10-month highs. The rally in the latter half of 2018 was perfectly justifiable—what with incredibly high levels of volatility in the stock markets, deteriorating trade relations between the US and key trading partners and a brawny greenback. The sharp equity selloff was beginning to pose a systemic risk, which encouraged the fear trade syndrome that gold thrives on. Gold is considered the ultimate fear hedge that typically performs best when investors start running for the hills.

The current year, however, has been markedly different with global stocks taking out multi-month highs and the markets calming down amid expectations that the US and China could finally strike a trade deal. It’s not very often that President Trump has something good to say about China or the ongoing trade talks. Yet, an uncharacteristically upbeat tweet by the head of state citing “big progress being made on soooo many fronts” has both sides excited that a stalemate may finally be within sight.

It’s the kind of backdrop that you would normally expect to take a toll on safe haven assets like gold. So, why are investors still flocking to the yellow metal?

(Click to enlarge)

(Click to enlarge)

Source: APMEX

(Click to enlarge)

Source: CNN Money

Wall of worry still intact

While market volatility is currently nothing like what we witnessed towards the latter end of 2018, it would be premature to declare that we are already home and dry. February gold future prices have been constantly climbing, a clear indication that risk-off sentiment is still pervasive. Related: Amazon Paid Zero Corporate Tax For Second Year In A Row

Although trade tensions between the US and China have undeniably loosened, there’s still quite a lot that can go wrong. Chinese news agency Xinhua reported on Friday the two protagonists had reached a consensus in principle on several key issues without divulging any details. However, it’s still too early to say whether a lasting deal can be reached. While a stalemate would probably be acceptable for both sides, markets hate uncertainty and any unfinished business or half-hearted deals would simply not bode well for market stability.

Former China director at the IMF, Eswar Prasad, expressed these doubts succinctly:

My baseline assumption is that very close to the deadline, we will come up with a deal that certainly will not be comprehensive, durable and long-lasting by any means but at least allows both sides some breathing room by de-escalating hostilities or at least a cessation of future hostilities.”

Back home, investors recently got a real scare that a recession is still not off the cards after the US Ministry of Commerce reported abysmal holiday sales. December retail sales plunged 1.2 percent, considerably worse than even an earlier pessimistic outlook that called for 0.2 percent growth. The marked the biggest contraction since September 2009 when the  country was exiting one of the worst financial crises in history. Consumer spending is a closely-watched metric because it powers more than two-thirds of the US economy. But it’s not just slumping sales that investors have to contend with. Signs of trouble are emerging in the employment market with jobless claims rising for the third week in a row.

Although some experts think that the brutal stock market selloff in the final quarter of the year was mostly to blame, others are warning that it could signal the end to the longest economic expansions in history.

But perhaps nothing has been working in gold bulls’ favor like a suddenly coy Fed. After a particularly busy year that witnessed four round of tightening, the central bank is now taking a breather—and might decide to stay put much longer. The bank decided to hold steady after January’s FOMC meeting, and are likely to tread with much more caution after the latest retail and job report.

Related: Trade Talks Dominate Market Sentiment

Overall, there’s more bullishness in the gold market than there’s been for more than a year. Wall Street punter Bernstein says the long-term outlook remains great amid a rush by central banks stockpiling the metal while other studies have shown that gold is even getting some love from the bitcoin camp.

Even the short-term gold technicals seem to agree with that outlook:

(Click to enlarge)

Source: Investing.com

By Alex Kimani for Safehaven.com

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