*By Christophe Barraud, Chief Economist & Strategist at Market Securities
As I already highlighted last week, TrackInsight data show that investors kept piling into “Gold” ETFs with cumulative inflows hitting a new YTD high. As a safe heaven, gold has benefited from trade and geopolitical uncertainties (U.S. protectionist policy, Middle East/South China sea tensions, Brexit, etc…), however, it could be more and more used as a store of value to the extent that most of government bonds, IG (investment grade) bonds have been associated with negative rates. Furthermore, cash is no longer king in several countries with banks starting to implement a negative interest rate on deposits.
As I noted several times; central banks will remain particularly accommodative in the short term. The probability of this scenario has increased sharply following President Trump’s announcement (last Thursday) that the U.S. will put 10% tariffs on another $300 billion worth of Chinese goods, effective Sept. 1. This move will exacerbate downward pressures on global trade growth and could hit significantly U.S. personal consumption expenditures (the main driver of U.S. growth).
The fact is that economic figures have not even reflected the impact of the previous U.S. tariffs (the increase on $200 billion worth of Chinese goods from 10% to 25%). As a reminder, even if there were announced in early May, they started to be collected mostly from mid-June. As a matter of fact, the WSJ underlined that the U.S. collected only $6 billion in tariffs in June, up from $5.3 billion in May.
The impact of those tariffs on household spending is unlikely to be negligible according to the Federal Bank of New York. Based on its estimates, the total cost of increasing the tariff rate from 10% to 25% on $200 billion of Chinese imports could be $831 per typical household (almost twice the amount of 2018 tariffs).
New tariffs on $300 billion worth of Chinese goods should be more damaging. Consumers haven’t felt much impact from tariffs imposed earlier because those duties mainly targeted intermediate and capital goods (used to produce other things). Therefore, U.S. and Chinese companies have generally absorbed a large part of increasing costs, passing only a limited amount to consumers. It should be different with consumer goods and the timing is not helping (just before the inventories building ahead of Thanksgiving/Christmas spending season).
As a result, economists should keep adjusting lower their forecasts at least for 2019 both concerning U.S. (2.5%e for now) and Global GDP (3.3%e for now). It explains why central banks are expected to remain accommodative and most of them have implemented actions (sometimes aggressive) since the beginning of the week namely RBNZ, RBI, BOT and BSP. Expectations concerning the SNB, the ECB, the BOJ and especially the Fed are also gaining traction ahead of Jackson Hole meeting scheduled for August 22-24.
In this context, CNBC noted yesterday (citing Deutsche Bank) that “about $15 trillion of government bonds worldwide, or 25% of the market, now trade at negative yields. This number has nearly tripled since October 2018”. In the meantime, according to Bloomberg, “the average yield on investment-grade debt in euros fell below zero for the first time ever. The yield on the Bloomberg Barclays EuroAgg index closed Wednesday at -2 bps”. Therefore, it makes non-interest bearing bullion more competitive against other assets.
Furthermore, the arbitrage between holding gold and cash (as a safe haven) is also slowly turning in favor of gold given that in several countries, banks started to charge clients for their deposits. As an example, according to the Guardian, “UBS, the world’s largest wealth manager, told its ultra-wealthy clients on Tuesday that it would introduce an annual 0.6% charge on cash savings of more than €500,000 (£461,000). The fee, to be introduced in November, rises to 0.75% on savings of more than 2m Swiss francs (£1.7m)”.
All in all, the current environment (negative yields on governments bonds, IG bonds, deposits) is more and more pushing investors to think about gold as a store of value.
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