Will commodities buy the US-China story?

on Dec 16, 2019
Updated: Mar 11, 2020
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  • Last week’s US-China Phase One trade deal saw several stocks jump.
  • While gold was expected to plummet as stocks gained, the yellow metal remained bullish signalling changing investor attitude.
  • The Phase One trade deal prevented additional tariffs on Chinese goods paving the way for the US to export farm inputs to China.

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If last week’s rally after the US-China Phase One trade deal is anything to go by, then it means that investor confidence is starting to build in a market that just days ago was on a downward trend. While the effects of the 18-months long trade war could slowly be fading away, experts warn that inflation could pick up from that point unless investors get along with natural resources.

But the price of gold rose last week, meaning the narrative is about to change.

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As a unique universal commodity, gold’s purpose in the economy is somewhat different from other naturally-occurring commodities such as oil.

Gold serves as a hedge against fiat currencies and is also known to maintain steady gains during economic downturns.

When news of the Phase One trade deal went public, stocks gained as gold remained bullish, with experts interpreting the unusual occurrence to mean investors are looking to hold on to hedges long beyond the first phase of negotiations. In other words, the market is still in a wait-and-see state with stage two talks set for next year.

Away from gold, crude oil made a steady gain last week on Friday to settle at an almost three-month high: the U.K. Brent crossed the $65-mark while the U.S. West Texas Intermediate hit the $60 per barrel resistance long-eyed by oil bulls.

The new deal saw the US president Donald Trump shelf his initial plan to impose tariffs on Chinese goods worth about $160 billion that included iPhones, toys and among other consumer products.

However, duties amounting to 25% on $250 billion of other Chinese imports would still be imposed, as well as a 7.5% tax on another batch of products worth about $120 billion.

Beijing agreed to purchase farm inputs from the US in exchange for the scrapped tariffs.

As the US approaches next year’s elections, Trump appears to be fronting as many deals as possible even as the Democrats as brewing a possible impeachment motion that could see the president’s term come to a close prematurely.

“With so much that has transpired in the past 17 months, markets expect precise details on what the two sides have agreed to in order to gauge the success of future negotiations,” Adam Sarhan, founder and chief executive at 50 Park Investments, a global markets investment advisory service in Orlando, Florida said.

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