Will the Gold Price Rally Get Another Life?

Gold prices have dropped significantly from the highs of $1,340 an ounce seen toward the end of February this year. The precious metal is now trading at around $1,280 an ounce as a number of factors have emerged against the commodity.

What’s Working Against Gold Prices?

A lot of variables have combined to derail the gold price rally. For instance, the U.S. economy has continued improving as the unemployment rate has dropped to a nearly five-decade low of 3.6%. What’s more, along with the jobs, people are getting paid higher as an uptick in wages show.

Gold is an unattractive investment right now as the need for a safe haven asset drops when the economy improves and Treasury yields inch up on the back of stronger interest rates.

April wages rose at a yearly rate of 3.2%, making it the ninth consecutive month when wages have increased at a rate of over 3%. There were 263,000 jobs added last month, which easily beat the general consensus of 190,000 new jobs and an unemployment rate forecast of 3.8%.

Because of such terrific jobs performance, the Federal Reserve is unlikely to cut interest rates as the state of the economy is improving. This makes gold an unattractive investment right now as the need for a safe haven asset drops when the economy improves and Treasury yields inch up on the back of stronger interest rates.

Given that central bank buying was already expected to drop to a range of 500 tons to 600 tons this year as compared to last year’s figure of 652 tons, an improving U.S. economy could pose further demand challenges for the gold.

But at the same time, investors shouldn’t miss the fact that there are some other factors in play that could act as a catalyst for gold prices.

Why the Gold Price Rally Can Get a Shot in the Arm

Gold investors shouldn’t be disheartened as the U.S.-China trade war and retail buying could act as tailwinds for the precious metal.

Gold prices have climbed lately despite positive U.S. jobs data as U.S. President Donald Trump has threatened an increase in tariffs on Chinese goods. As reported by CNBC:

United States President Donald Trump on Sunday announced he would hike tariffs on $200 billion worth of Chinese goods this week. He also said he would target a further $325 billion of Chinese goods with 25% tariffs “shortly”.

This about-turn from Trump, who had said last week that the trade talks with China were progressing well, has triggered a flight to safety among investors. As a result, gold prices have increased.

But that’s not the only reason why gold prices are picking up the pace. According to the World Gold Council, demand for the precious metal increased 7% in the first quarter of 2019 as compared to the prior-year period.

As such, there’s a good chance that the gold price rally will get back on its feet on account of improving end-market demand, as well as economic tensions between two global economic superpowers that isn’t dying down. So if you’re holding gold equities, don’t press the sell button just yet because there’s a recovery in the cards.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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