Precious Metals Should Rise on U.S./China Trade War
Precious metals like gold and silver, which are often viewed as a safe haven investment, have been on a rollercoaster over the last year. Most recently, silver and gold prices trended significantly higher during the market wide sell-off in the fourth quarter of 2018. While precious metals have trended lower since February, silver and gold prices are still holding up well.
The big question is, will investors flock to precious metal prices as a safe haven investment and send prices higher as fears of a full-blown trade war between the U.S. and China, the world’s two largest economies heats up?
What is a “safe haven investment?” When the markets are uncertain, investors turn to investment they believe will do well, either by retaining or increasing in value. Investors typically seek out safe haven investments to limit their losses should the markets sell off. Examples of safe haven investments include gold and silver, bonds, defensive stocks, and cash.
Not all market turbulence is the same though. What might be a good safe haven investment in one downturn may not be a good investment in another. That’s why it’s important to evaluate the current market sentiment and underlying issues.
In the event of a trade war between the U.S. and China, gold and silver are expected to be an attractive safe haven investment. Despite assertions from Washington that the trade war will not impact American businesses and consumers, if it drags on, the trade war cannot help but weaken the U.S. economy, which in turn means a lower U.S. dollar. Should this happen, it’s quite possible that the Federal Reserve could cut its key lending rate. All of which is bullish for silver and gold prices.
A full-blown trade war between the two countries is not a certainty. President Trump could postpone his decision to hike tariffs on $200 billion-worth of goods from China to 25% from 10%. This would have positive short-term ramifications, but it also means ongoing uncertainty about what the President is going to do, which is never a given.
Another, Potentially More Damaging U.S. Trade War Is Brewing
There is more than just one trade war percolating right now though. And some analysts believe the biggest threat to the global economy is a trade war between the U.S. and Eurozone. A retaliation from the Eurozone could be more damaging to the U.S. economy than a trade war with China. China is the second biggest economy, but the Eurozone is the world’s biggest economic block.
Concerns about a trade war with the Eurozone may have been behind the selloff in the first week of May, which hit American companies that rely heavily on sales outside of the U.S. the most.
Like a trade war with China, a trade war with Europe could hurt the U.S. economy and U.S. dollar, forcing the U.S. central bank to cut its lending rate. It’s not an unlikely scenario. Wall Street seems to believe it’s going to happen. Right now, the markets are pricing in a 70% chance that the Federal Reserve will actually cut interest rates by the end of the year.
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A trade war on two fronts would be disastrous for the U.S. economy. Even still, a trade war with either China or Europe could derail the global economy. Should this happen, some equities and asset classes will do better than others. The trading professionals at Learn-To-Trade.com can teach you which ones will, and which ones won’t.
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Photo Credit: iStock.com/Olivier Le Moal
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