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Abu Dhabi, UAEWednesday 19 December 2018

Gold lives up to its safe-haven reputation amid trade war fears

The precious metal is expected to perform well in 2018 amid geopolitical tensions

The Federal Reserve’s monetary tightening does not appear to be denting gold’s rally. Petr Josek / Reuters
The Federal Reserve’s monetary tightening does not appear to be denting gold’s rally. Petr Josek / Reuters

Gold posted strong gains in the second half of last month amid trade war worries and geopolitical tensions. The classic safe-haven buying trend picked up, as US President Donald Trump imposed high import tariffs on several important commodities. It accelerated, as geopolitical tensions stemming from the Middle East stirred up again, only cooling down ahead of the holiday break. These arguments appear to support the case for gold outperforming in 2018.

Taking the drivers one by one, the trade war worries flared up during the middle of last month when the Trump administration slapped high tariffs on steel and aluminum. Both commodities are used extensively in construction and industry, and the tariffs represent a significant block to foreign companies selling to the US.

The country was the world’s number one steel importer, with a recent peak in 2015 of imports valued at US$30.5 billion. Between 2009 to 2016, a massive steel deficit was built up amounting to minus 269 per cent. The White House’s protectionism may boost domestic steel producers, but fears over a global trade war rippled through the markets, boosting gold. Risk-off patterns emerged, and animal spirits only started to calm down after the news that the EU would be exempt for the time being from steel import tariffs to the US.

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Geopolitical tensions over Russia versus the West worried investors even more towards the end of last month. Diplomatic relations fell to lows unseen since the Cold War, with gold providing comfort to wary investors. At the same time, further tensions between the Gulf and Iran stoked more uncertainty, adding to safe-haven buying urges.

It appears investors are even more concerned over political tensions than the prospect of more trade wars, a sentiment I share. Still, when the twin spectres of protectionism and geopolitical tensions appear at the same time, a sharp spike in the gold price is only to be expected. In fact, four out of four of the commodity's most bullish price drivers made an appearance in March, when you add in the volatility in stock markets and an expected rise in inflation which featured strongly in economic news.

Not even the Federal Reserve’s monetary tightening appears to be slowing down gold’s rally. Taking a look back, the precious metal outperformed during four of the last six tightening cycles. Monetary tightening may normally be expected to have a bearish effect on the precious metal, but other underlying factors played heavily over the last year and a half. Periods of weakness in the US dollar, and some measure of uncertainty over US growth versus its high debt levels still give investors pause and an inclination towards safe havens. Last but arguably not least, the revolving door of Trump’s administration has key government figures coming and going in a blaze of publicity, knocking on investor confidence.

Looking ahead into the second quarter, gold may continue to outperform on the basis that geopolitical tensions and protectionism in the US are likely to prevail, spooking investors into safe-haven buying.

Hussein Sayed is the chief market strategist at FXTM