“It just doesn’t get any bigger than this”. At least that is how President Trump is portraying the signing of the “Phase One” deal with China last week. But while talks between the two nations are undoubtedly positive for global trade, do they really make a substantive change in circumstances? Equity markets don’t seem to think so – they were only fractionally higher in response to the news.1 By contrast, gold initially fell by 0.27% before slowly reclaiming some of that marginal decline.
The Art of the Trade Deal
21 January, 2020
This modest reaction is in line with what is a modest step. The “Phase One” deal seems to omit many of the key issues which lie at that heart of US-China tensions. For example, the US will maintain tariffs on around two-thirds of Chinese imports as talks continue on the next phase of a deal. Plenty of questions remain on how some of the thornier issues will be addressed in any further talks. Scepticism remains high.
As a result, uncertainty and volatility will likely remain elevated, something we discussed in our outlook for 2020. While investors have been accustomed to such conditions in recent years, complacency has not set in. Last year, in search of an effective diversifier to protect against such risks, institutional investors and central banks flocked to gold. ETF demand hit 400t in 2019, while central bank demand approached 600t at the end of November. And at the start of this year, the gold price has already gained 2%, building on the 18% rally in 2018 which saw the price reach its highest level since 2013.
So, while the US and China have taken their first step towards trade negotiations, optimism seems fragile as many questions remain unanswered. This should, for now, be supportive for gold, as investors continue to look for effective diversifiers in the face of persistent uncertainly and volatility.
Footnotes
1 Although some of this more muted reaction could be the fact this deal was expected by the market.
