Relatively calm trading in risk assets belies signs of concern about the potential impact of a worsening trade war on the global economy as gold prices continue to hit record highs.
Markets have been less reactive to trade war escalation this week and gold continued to soar after US President Donald Trump announced 25 per cent tariffs on steel and aluminium.
Amid unprecedented demand from central banks and fear of a global trade war as the US continues to increase tariffs, gold has risen six weeks in a row.
It’s heading for a seventh straight weekly gain — something it hasn’t done since mid-2020.
Gold was already the top performing major asset class after rising 2.2 per cent last week amid a rollercoaster ride for global risk assets after the US President ordered, then delayed, 25 per cent tariffs on Canada and Mexico and went ahead with 10 per cent tariff increases on China.
After hitting a record high of $US2942.68 per ounce on Tuesday after Trump went ahead with steel and aluminium tariffs, gold was up as much as 2.9 per cent for the week and 12 per cent for the year.
(It’s worth noting volatility in gold is increasing as it nears the psychological $US3000 mark Citi set as its three-month target last week. Volatility can be an early sign of turning points.)
It was perhaps telling to see gold briefly erase all of a 1.2 per cent intraday rise in the space of 10 minutes in the normally quiet Asia-Pacific market on Tuesday.
However, liquidity would have been a fraction of normal levels, with Japan closed for a public holiday.
Citi is wary of a pullback in gold around late March or April — perhaps on certainty over whether any broad tariff may include gold or not and further progress is made towards ending the Russia-Ukraine war.
Such developments would be “something for the bulls to be wary of” but also a “dip-buying opportunity given gold’s persistent/structural bull factors remain intact,” according to Citi global head of commodities research Max Layton.
In its February update, Citi said the gold bull market was set to continue under Trump 2.0.
The US bank sees trade wars and geopolitical tensions reinforcing the reserve diversification/de-dollarisation trend, supporting official gold sector demand from emerging markets’ central banks such as those in China, India and Turkey.
The Russia/Ukraine war touched off a wave of buying from emerging markets’ central banks after Russia’s foreign reserves were frozen. The People’s Bank of China increased its gold reserves for a third month running in January after ramping up its gold-buying effort in the December quarter.
Global growth concerns related to tariff increases and the elongated economic cycle should also lift private investment demand for bars and coin, ETFs and over-the-counter buyers, according to Citi.
“Despite the US soft landing scenario we assume in our base case, we expect gold ETFs to stay on the bid thanks to heightened level of macro and geopolitical uncertainties, including trade wars, Middle East escalation risks, still-high interest rates weighing on growth, continued deterioration in the US labour market, drawdown risks in equity markets, and the need for portfolio hedging/diversification,” said Citi commodities strategist Kenny Hu.
Based on Citi’s investment-led fundamental flows-based framework for gold pricing, investment-and-industrial demand remains historically high, at 82 per cent of mine supply.
Under Citi’s framework, this is set to rise to over 95 per cent by the December quarter of 2025.
This should “underpin extremely high gold prices by historical standards, in order to disincentivise jewellery demand and incentivise scrap and mine supply,” Mr Wu said.
The level of investment as a share of mine supply has been a strong predictor of changes in gold prices since 2010, according to Citi. When investment is above 70 per cent of mine supply, gold prices tend to rise in order to disincentivise jewellery demand and encourage mine and scrap supply.
Therefore, in a bull case scenario, gold could rise “well over $US3300 per ounce”.
But, based on other models, Citi’s “more conservative base case” has gold averaging $US2900 per ounce in 2025 and rising to $US3000 over the next six to 12 months.
Mr Wu also points out the US economy and labour market have been slowing for the past two to three years, with US nominal and real rates remaining around 20- to 25-year highs, with US government interest costs continuing to rise sharply.
US stockmarket strength has supported US consumption and the labour market in recent years.
The average US household’s wealth rose $US50,000 year-on-year and US$150,000 since 2019.
US unemployment indicators and JOLTs data have shown weakening trends in the labour market despite a brief recovery following the US elections and Trump’s victory.
“We expect eventually higher unemployment rate, growing concerns on US growth outlook and drawdown risks in US equity markets to lead to rising levels of household fear and precautionary savings, which are historically associated with rising gold demand through ETFs, as well as and over-the-counter and other investment demand for gold,” Mr Wu added.
While Citi is expecting a soft landing for now, Mr Wu notes gold tends to rise both into and out of US downturns, albeit with brief sell-offs during the height of the fears surrounding the downturns.
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