Global Trade War Between China and USA and How It Affects Gold

There is an ongoing trade war between the United States of America and China. Since 2018, the US has imposed tariffs on Chinese imports. China has, in turn, imposed retaliatory tariffs on US goods. The trade talks between the US and China have remained unresolved so far.

1. Global economy:

The trade war threatens global economic growth. The imposition of trade tariffs have caused disruptions in the global supply chains and created uncertainty over global trade. The World Bank has lowered the global growth forecast to 2.6% for the year 2019. The IMF has reduced global growth forecast to 3.2% for 2019.

2. Global financial markets and gold as a safe-haven asset:

Global financial markets have primarily reflected trade uncertainty and impact on economic growth. Investors globally are faced with little or no gains from their stock investments. Also, global financial markets have been volatile, and equity investments have turned risky. Institutional investors and large fund houses have reshuffled their investment portfolios in various economies. In such circumstances, investors prefer to allocate a portion of their investment portfolios to gold.

Gold prices have gained about 18% in the year 2019, the highest gain in two years. Gold prices delivered negative returns in 2018. In 2017, gold prices rose by 13.1 per cent. Investors traditionally prefer gold as a safe-haven investment in uncertain times. Gold prices have remained firm after the recent rally in August 2019. 

Here is a graph that captures the variations in gold prices from 2015 to 2019:

In an uncertain economic environment, investors would prefer safe-haven asset such as gold over equities. The returns on equities depend on good economic performance. US and China are carrying on trade negotiations to improve trade relations. But the outlook for global economic growth is bleak with little or no increase in exports. 

Also Read: Invest in Gold and Diversify Your Portfolio to Mitigate Market Volatility

The uncertainty of Brexit, United Kingdom’s exit from the European Union and US-Iran geopolitical tensions have contributed to trade uncertainties. These factors have also fueled the recent rally in gold prices. 

Though the US and China are among the key economies of the world, even the US faces a weak economy. The US Federal Reserve has lowered the target range for its key interest rate by 0.25% to help the US economy. China too is facing a slowing economy. Many companies are relocating their manufacturing facilities out of China.

The global demand for goods has slowed down. The US is carrying on trade negotiations with key economies such as China, India, and Japan. The global economic environment remains uncertain for investors. 

Thus, the investment prospects in gold continue to remain attractive. Amongst the various options, investors can consider investing in gold coins and bullion bars. Many economies are also promoting gold ETFs (Exchange Traded Funds) in place of physical gold.

The units are available in the smallest size of 1 unit equal to 1 gram of gold. Due to ease of availability and small size of the investment, small investors too can invest in gold ETFs.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in