A looming currency war layered on top of escalating trade tensions between the U.S. and China is giving gold an added boost.
The yuan’s fall to a decade low “is a game-changing response from China,' Nicky Shiels, an analyst at Bank of Nova Scotia, said in an email. 'It essentially removes any chance that a trade deal is likely in the near term.'
That’s adding to gold’s appeal as a haven asset following a week when holdings in BlackRock’s iShares Gold Trust, the second-largest bullion-backed ETF, had already climbed to a record and hedge funds boosted their bullish bets on the metal. The heightened tensions are likely to ensure yields will stay lower for longer, making non-interest-bearing precious metal more competitive against riskier assets, Shiels said.
As global equities tumble amid a wide sell-off in riskier assets, speculation is mounting that central banks around the world will cut their borrowing costs to counter slowing growth, a move that reinforces the case for owning bullion. On Monday, President Donald Trump branded the yuan’s plunge as 'currency manipulation,' indicating that he’d like the Federal Reserve to counter China’s action.
'If you wanted to have one asset that actually kept a lot of that value very well, I think that asset would essentially be gold,' Michael Widmer, the head of metals research at Bank of America Merrill Lynch in London, said in a telephone interview.
The precious metal climbed to a six-year high on Monday, approaching $1,500 as the trade war disrupted the S&P 500 index’s record rally. The raging dispute could cost the world economy $1.2 trillion, according to an estimate by Bloomberg Economics. A widely watched Treasury-market recession indicator was already at the highest alert since 2007.
Even before fears of a currency war erupted, hedge funds had already awakened to gold’s bullish potential. Money managers’ long position almost tripled from a low in April. While those wagers account for about 27% of open interest, or the tally of outstanding futures and options contracts, there is room to push up that share to a level last seen in 2016 and 2017, sustaining the rally, Citigroup Inc. analysts including Aakash Doshi said in a note Monday.
Citigroup raised its three-month gold price outlook to $1,525 an ounce, after prices broke above its previous target of $1,450. The metal is likely to cross $1,500 by the fourth quarter, the bank said in a separate note. Futures for delivery in December settled at $1,476.50 after touching $1,481.80, the highest for a most-active contract since May 2013.
"We do not view money manager gold positioning on Comex as ‘stretched’ long," Citigroup said. "There is significant scope for fresh bullish" bets to be added, the bank said.
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