By Matthew Johnston
One of the main drivers of the recent gold rush is the continuing uncertainty surrounding the U.S.–China trade war and the potential economic fallout. All eyes will be on U.S. President Donald Trump and Chinese President Xi Jinping as the two leaders are expected to meet at some point during the G-20 summit, which is set to kick off Friday in Japan. An unfruitful meeting could result in additional tariffs, adding further weight on global trade and equity prices, while providing gold, gold stocks and gold ETFs with a significant boost.
What It Means for InvestorsInvestors tend to flock to assets considered safe havens when the economic outlook begins to darken and the downside risks to stock prices multiply. The ongoing trade conflict between the world’s two largest economies has been the main catalyst to that darkening outlook, as forecasts of economic growth and corporate earnings show signs of weakness.
Although gold is not the only available safe-haven asset, there are a number of reasons it’s attracting a lot of investor cash right now. Government and investment-grade corporate bonds are often seen as safer than equities. Bonds offer yield, but those yields have been at historic lows over the past decade.
Even one of the safest of safe assets, U.S. Treasuries, is looking less attractive after dovish comments made by the Federal Reserve at last Wednesday’s monetary policy meeting sent the benchmark 10-year Treasury yield below 2%, to levels not seen in several years, according to The Wall Street Journal.
Meanwhile, gold rallied as the prospect of looser monetary policy weakened the outlook for the U.S. dollar. A cheaper greenback is bad for dollar-denominated assets, making them less attractive. But it’s good for gold, whose price tends to move in the opposite direction as the dollar. It’s also good for assets tied to the strength of gold, like gold stocks and the gold ETFs that hold them.
The VanEck Vectors Gold Miners ETF has risen nearly 20% since the start of the year and over 23% in the past month alone. It contains shares of 46 major gold miners, including Newmont Goldcorp (NEM), Barrick Gold (GOLD), Newcrest Mining (NCM.Australia), Franco-Nevada Corp. (FNV), and Agnico Eagle Mines Ltd. (AEM).
The iShares Gold Trust ETF is up 9% both since the start of the year and over the past month. The fund tracks the price of gold through holdings of physical gold bullion in a trust, with each share of the trust representing one-tenth of an ounce of gold.
Looking AheadThe performance of gold and gold ETFs will depend, in large part, on the outcome of future trade negotiations and whether existing tariffs are lifted or new ones are imposed. “Tariffs can be thrown around as an economic bomb for anything now,” Peter Boockvar, CIO at Bleakley Advisory Group, wrote in a note. “Gold is finally back above $1,300, and I’m shocked it’s not much higher.”
Having written his note at the end of May, Boockvar has less reason to be shocked with the price of gold now hovering around $1,400 an ounce. If the Trump–Xi negotiations turn sour and gold prices skyrocket, he might just forget he was ever shocked at all.