Gold Shines Even More in a Wild Week, All About Trade War

A 1,72% rally.

Hey FX Emperors, that’s how much the yuan got depreciated this week, meaning that the USD/CNY jumped from below the 6.950 area to break above 7.000 and to traded as high as 7.0632 this week.

Not needed to say it, but it changed everything in the investing landscape this week. Stocks tumbled, market sentiment got depressed, the dollar index was shaken, and gold rallied to multi-year highs.

The Yuan depreciation changed everything because it showed investors and main street people how hard a trade war resolution would be and that in line of the latest developments, the most probable outcome from the U.S. and Sino tariff conflict is a global recession.

It has been just ten years from the great recession, and it seems we didn’t learn the lesson. It seems that we never learn, but here we go again and risk aversion took the market.

Problems in all fronts

In this wild week framework, equities in the United States are set to post another decline, GDP in the United Kingdom published an unexpected drop in the Q2, sending the GBP/USD to its lowest level in over two years. Yes, a level not seen since the UK approved article 50 to activate Brexit.

Treasury bonds also suffered from the drumbs of war and fears for recession. The 10-year Treasury bond yields fell 7.14% just on the week. 10-year Yields fell to 1,60% on Wednesday, its lowest level since October 2016. Then, it recovered to 1.80% on Thursday, but today, it declined again to 1.715%, yet due to Yuan depreciation.

What a week, the risk aversion environment put gold in the center of investors eyes and XAU/USD jumped over 4.0% to trade at highs since April 2013 at 1,510. Yes, higher than the prices reached in the great recession and above Brexit important dates. The trade war has been the trigger.

That’s why the 1,72% rally in USD/CNY is very significant. You can smell fear in Wall Street desks, and watch concern in the eyes of analysts talking in front of journalists. With a global economy still in convalescence after 10-year of central banks assistance, are we heading to a new recession? Yes, everybody is thinking that.

And even worse, experts are now asking themselves how U.S. President Donald Trump will answer to China Yuan depreciation. Think twice, a sanguine temperament person who always wants to looks like the winner.

Gold ready to close this wild week with strong gains

After two days of consolidation, gold is trading near to highs since April 2013 at 1,510 as investors are betting in safe-haven assets instead of riskier investments due to concerns of trade war escalations.

“The trade spat is driving the market crazy. We don’t rule out technical corrections, but $1,500 is now the new normal unless trade relations take a turn in a right direction,” Jigar Trivedi, commodities analyst at Anand Rathi Shares & Stock Brokers, said to CNBC in an interview.

In the same line, as FX Empire analyst James Hyerczyk commented in a recent article, “the steep drop in yields raised fears of a global recession.” Consequently, “this is the focus for gold traders.”

So, a normalization in bond yields would mean a more temperated gold prices. However, to get a recovery in bond yields would need some kind of resolution in the trade war. Alternatively, at least, a sort of common sense.

Besides, as central banks are starting to offer negative interest rates, investors prefer to buy gold than pay to banks to hold their money. “Although holding gold pays no interest, zero interest is better than paying a government to borrow your money,” Hyerczyk highlights.

Back to the XAU/USD, gold is currently trading at 1,497, 0.27% negative on the day, however, it well-supported by a dynamic uptrend support that comes from November 28 and it acted as resistance before its break on August 7.

On the week, XAU/USD is trading 4.0% positive as the trade war triggered the rally earlier in the week, and investors consolidated gains the second half of the period.

Be aware of profit-taking FX emperors!