As markets take a turn, investors flock to gold. Is this clever or foolish?

Hanging over markets is also the question of what comes next.

Following the failure of the US and China to reach a trade deal, fear has spread throughout the markets that the trade war between the world’s two largest economies will not be coming to an end anytime soon.

On Friday (10 May), the US hiked tariffs on $200 billion worth of Chinese goods from 10% to 25%. This was followed by China announcing it would increase tariffs to 25% on $60 billion worth of US imports. US president Donald Trump has since threatened further tariffs.

Markets have, predictably, reacted badly. On Monday (14 May), US markets were down 2.5% from their 30 April all-time closing high, while other major indices around the world have all turned red, although to a lesser extend has the FTSE 100 been impacted. The index declined by 0.55% yesterday, but has recouped its losses today, up 0.89% at 2.30pm.

This was partially the result of the optimism around a trade deal driving markets earlier in the year. Following the Buenos Aires “truce” in November, markets appeared convinced that the trade dispute would soon be coming to an end. Instead, the trade dispute escalated, causing markets to give up some of the gains made this year.   

Hanging over markets is also the question of what comes next. Markets are likely unsettled by having little way of knowing whether the new tariff regime between the US and China is just a temporary measure, the new normal or a precursor for worse to come.

At the same time, markets have little historical precedent to work with to determine what the outcome of a full-blown trade war between the world’s two largest economies would be.

During such uncertainty, many investors appear to be fleeing to gold, a traditional safe haven asset. On Monday, gold prices climbed by 1% to $1,298 a troy ounce, just below last month’s $1,300 barrier peak. At the same time, The Pure Gold Company has reported a 234% increase in the volume of physical gold bars and coins purchased on Monday (compared to the daily average in 2019).

Josh Saul, CEO of the gold investment firm, says: “The 73% of clients investing in gold yesterday were financial professionals (from banking and financial services sectors). Their key concern is the effect of China’s retaliation to president Trump’s imposition of tariff hikes.”

Investors, however, should remain cautious about fleeing from equities to gold. While gold does tend to rally in times of increased fear, outside of such windows it generally does little in terms of price (and of course has no dividend to satiate investors in the meantime). Over the past five years, the return on gold has been mostly flat.

Current fears are now already priced in, meaning the direction gold will move in next depends (among other potential market moving events) on the political machinations of both Trump and China’s president Xi Jinping. Should the trade war fail to escalate, the gold metal will likely give up recent gains. Should relations between the US and China deteriorate further, gold could rally again. The point is, trying to make a call either way is a stab in the dark.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment