Gold may surge to $3,400 as trade tensions intensify; here's what to do

Gold: Surging as trade war escalates

Performance:

On April 17, Spot gold traded between $3,251 and $3,343 as it closed with a huge gain of 2.80 per cent at $3,343.

 

The yellow metal has rallied over 13 per cent in the last seven sessions since it hit its cycle low at $2,955 on April 7.

 

Spot gold surged solidly higher on safe haven demand as trade war intensified with the Trump Administration looking into imports of computer chips, chip making equipment and pharmaceuticals. The US Department of Commerce seeks public comments within three weeks.

 

Although US President Donald Trump delayed reciprocal tariffs for 90 days, except for Chinese exports, he still plans to impose tariffs on pharmaceutical drugs, lumber, copper and computer chips. The Commerce Department is investigating how imports of computer chips, related equipment and products that contain them (which include cars, refrigerators, smart phones, etc.) - affect national security so that the possible threats could be curbed with imposition of tariffs.

 

 

Relief on exemption of electronics from reciprocal is fleeting as pharmaceuticals, semiconductors and autos will be subjected to sector specific tariffs. The US wants to make its own drugs. More than 70 per cent of the active pharmaceutical ingredients used to make medicines in the US are produced in other countries. Although the US produces nearly 20 per cent of all pharmaceuticals globally, it consumes about 45 per cent, much more than any other country.

 

As per a fact sheet released by the Trump Administration on Tuesday, China now faces up to a 245 per cent tariff (125 per cent reciprocal tariff, 20 per cent tariff for fentanyl issues, section 301 tariffs on specific goods, between 7.5 per cent and 100per cent) on imports to the US because of its retaliatory actions.

 

Meanwhile Canada scrapped tariffs for automakers as long as the companies keep making vehicles in Canada.

 

Gold is up around 27 per cent year-to-date (Y-T-D).

Dollar Index and yields:

US Dollar index tumbled once again as NVidia Corp. and Advanced Micro Devices Inc. said that Trump's Administration has curbed the export of their chips to China. New restrictions on semiconductor exports to China will affect NVidia's H20 chip and AMD's MI308 chips unless they secure a license. The US Dollar Index fell to 99.28, down around 0.93 per cent on the day, as it continues to hover around its two-year low.  ALSO READ |  Tariff, yields, and trade war: Here's why silver is poised for more upside

 

Ten-year US yields have softened significantly from 4.59 per cent level seen on April 11. Yields closed around 1.68 per cent lower on the day at 4.26 per cent. Similarly, two-year yields at 3.77 per cent were down nearly 2 per cent on the day.

WTO slashes global trade forecast:

The World Trade Organization slashed its forecast for global trade this year due to economic uncertainty amid escalating trade war. The Organisation expects the volume of world merchandise to trade to decline by 0.2 per cent in 2025, which is a decline of roughly 3 per cent from the volume it expected without the trade war. The contraction may worsen to a decline of 1.5 per cent if the US goes ahead with the reciprocal tariffs. The WTO forecasts global trade to rebound by 2.5 per cent next year.

Data roundup:

US retail sales rose 1.4 per cent m-o-m in March, the most in over two years as consumers rushed to buy cars and electronic goods before the tariff deadline of May 3 for finished vehicles and on parts. Gains were observed in 11 out of 13 categories as sales of building materials, sporting goods and electronics also climbed. It is to be noted that many of these products are supplied by China. Control-group sales rose by 0.4 per cent in March. Industrial production lagged the forecast. UK inflation (March) came in at 2.6 per cent y-o-y against the forecast of 2.7 per cent, which raises odds of a rate cut by the Bank of England. Even month-on-month (M-o-M) data at 0.3 per cent was cooler than the expected readings of 0.4 per cent.

 

China’s GDP grew 5.4 per cent in the first quarter from a year ago, more than a forecast of 5.2 per cent as both production and consumption indicated picked up. Even industrial production and retail sales data were encouraging, but market has largely brushed aside these positive data as these data reflect the economic scenario of the period before the beginning of the trade war

 

Powell's speech:

The Fed Chair Powell, in his much-awaited speech on economic outlook at the Economic Club of Chicago, said that tariffs present a challenge to the Fed, but they would like to wait further before adjusting the monetary policy. He maintained his stance that the US economy is solid despite growing downside risk. As he dampened rate cut hopes, risk assets fell further, and perceived credit risk climbed higher that pushed gold further up.   

 

Gold ETF:

Total known global gold ETF holdings rose for the fifth straight day to 89.167MOz as on April 15, highest since September 2023. Gold ETF holdings are up nearly 6.3 MOz, around 7per cent, YTD.

 

COMEX gold inventory:

COMEX gold inventory stood at 44.012MOz as on April 14, down nearly 2per cent from its all-time high level of 45.072MOz noted on April 4.

 

Shanghai gold premium:

Shanghai gold premium was noted at $1.1668 as on April 16. Premium skyrocketed to a record high of $117.97 on April 4 as US-China trade tensions escalated with counter tariff impositions.

 

Upcoming data:

Today's US data include housing starts (March), weekly job data and Philadelphia Fed Business Outlook (April).

 

Upcoming event:

Today, the European Central Bank (ECB) will deliver its monetary policy wherein it is expected to slash rates by 25 basis points (bps).

 

Outlook:

Investors look forward to the outcome of the US-Japan trade meeting. The WTO said that a US-China trade war risks dragging the world into a recession. The Bank of Canada maintained rates at 2.75 per cent as it waits for more clarity on tariffs. The Central Bank warned that the nation could be subjected to a year-long recession in case of a full blown-out war. 

 

Investors are leaning towards aggressive rate cuts by the Fed this year as the US economic outlook darkens. Rising credit risk, risk to global economy, tumbling Dollar and healthy ETF inflows along with central banks’ gold buying are supporting the metal. Gold may rise to $3,400 (MCX June contract ₹ 97,700) in the near term and can possibly make a run towards $3,500 (₹1,00,000) if trade tensions escalate further. Support is at $3,300 (₹94,900)/$3,280 (₹94,300)/$3,245 (₹93,300).  (This article is by Praveen Singh – associate VP, fundamental currencies and commodities, Mirae Asset Sharekhan. Views expressed are his own.)