While the stock markets fell, commodities like gold (XAU) have been on the rise… but what is the catalyst to their recent moves, and how should new investors react?
In the current trade war between the United States and China, U.S President Donald Trump plans to add additional tariffs on top of the currently taxed $250 billion worth of Chinese imports. Starting from October 15, 2019 the remaining $300 billion worth of Chinese imports will face a 10% tariff. In response to this, China’s central bank, the People’s Bank of China, devalued the Chinese Yuan which dropped its value to 7 Chinese Yuan per U.S. Dollar. They stated that this was due to their concern about “trade protectionism and new tariffs on China,” and that they will “not engage in competitive devaluation.”
This resulted in President Trump labeling China as a currency manipulator as he revealed in a recent tweet, “China dropped the price of their currency to an almost a [sic] historic low. It’s called ‘currency manipulation.’”
These events have caused a drop in many stocks as was reflected in stock market indices, including the S&P 500 (SPX)(see Figure 1). With the speculation of a possible currency war, many investors moved out of the market because of uncertainty, causing the SPX to dive to $2822 on August 5; almost a 7% reduction from its peak of $3028.
In Figure 2, we see the current market structure for gold CFD’s (contracts for difference), analyzed through Elliott Wave Theory. Since the start of the trade war, investors have been moving towards safer investments as shown with the growth in gold. This commodity has been valuable throughout history as it continues to be a store of value, an asset used to diversify a portfolio, and a hedge against inflation or uncertainty in the market. New investors buying gold for the short term may want to hold back temporarily. On the weekly candlestick chart for gold CFD’s, the current third impulse may be ending for a short term correction as it hits a 1.618 Fibonacci multiple of wave one ($1160 — $1346) at $1558.
On the daily timeframe for the same asset (see Figure 3), a bearish divergence is shown where the price makes higher highs, but with lower highs on the RSI.
Currently on the SPX (see Figure 4) there is a consolidation phase, with a bearish divergence as seen with the higher price action on the chart, but with lower highs on the RSI. Until a breakout is seen through the resistance trendline against the three peaks, and the 1.236 Fibonacci extension at $3077, the SPX has not broken out of a corrective structure and will continue to trend sideways.
With the uncertainty and fear of a possible currency war, investors have been moving out of stocks to safer assets such as gold. Whether the currency war occurs or not, new investors will likely want to hold off from investing until the market’s cool down is over.
Written by Fahim Ahmed, Writer for the Junior Economist