Gold set a new 9-session high overseas at 1478.81 before once again coming under intraday pressure. The yellow metal is being underpinned by rising geopolitical tensions between the U.S. and China, which are amplifying the existant trade tensions.
The U.S. Senate passed the "Hong Kong Human Rights and Democracy Act" yesterday, eliciting a swift response from Beijing. A statement from China's Foreign Ministry warned that “China will take strong opposing measures, and the US has to bear all the consequences.”
After reconciliation with a similar House bill, the legislation is expected to be passed as an amendment to the National Defense Authorization Act before the Christmas recess. At that point, it moves to President Trump's desk to be signed or vetoed.
This comes at a critical time for the President with a Phase one U.S.-China trade deal reportedly close to being signed. That whole process could be derailed if it hasn't been already.
If the trade deal were to be suddenly off the table, there would likely be a serious unwinding of long positions in the stock market. As capital flees risk assets, safe-havens such as gold are typically a beneficiary.
As we noted yesterday, there has been some suggestion that China might be inclined to stall on a trade deal as the impeachment hearings play out. There hope obviously is that the President's hand is weakened and they end up with a more favorable deal.
There are a lot of moving pieces in this chess game and in my opinion, even the small trade deal that has been touted as being close at hand is feeling increasingly distant.
Later today, minutes of the most recent FOMC meeting will be released. The market will be assessing the level of commitment to the current pause in rate cuts, particularly in light of recent weak economic data that prompted a significant downturn in the Atlanta Fed's GDPNow model to expectations of just 0.3% growth in Q4.
While I don't think the Fed is likely to cut again in December based on U.S. data, an implosion of U.S.-Sino trade negotiations could change everything. Heightened rate cut expectations along with a new level of trade and geopolitical tensions would likely be very favorable for gold.
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