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The ongoing trade war between the U.S. and China has been the topic of significant debate over the last several months. The spat has shown it has the potential to move markets, and in recent weeks flashes of optimism have been met with disappointment. Although some recent rounds of talks were considered to be productive, no date has yet been set for President Trump and Chinese Leader Xi Jinping to formally sit down to hammer out a deal. Whether a deal is reached or not could have significant ramifications for the gold market.

Tariffs Could Negatively Impact Gold

Looking at the current situation, it is important to consider China’s place in the global economy. As the globe’s second-largest economy, Chinese raw material demand has the potential to have a significant influence over commodities of all types, including precious metals and base metals. If the trade war does continue and further tariffs are implemented, it could have a significant effect on overall business and investor sentiment, possibly putting a dent into overall investment demand and thus potentially acting as headwind for the gold market.

Although China may not be able to, on a tit-for-tat bases, keep up with U.S. tariffs, it does have other ways of fighting the trade war. If China were to start dumping its holdings of U.S. treasuries, for example, it could cause a spike in borrowing costs through higher interest rates, hurting the U.S. economy and perhaps causing investors to steer clear of assets like gold that have a carrying cost and do not produce income.

Tariffs Could Positively Impact Gold

On the flip side, a protracted trade war does also have the potential to boost the price of gold. Unlike base metals, for example, which are purchased for use in manufacturing and various areas of industry, gold is viewed primarily as an investment vehicle. In fact, gold is widely considered to be a “safe-haven” asset class that investors may turn to during times of economic or geopolitical duress. Although the gold market has seen some upside during brief periods of risk aversion in recent months, stocks have come roaring back from the sell-off and volatility seen late last year.

If it becomes evident that no feasible agreement on trade is going to be made, stocks could potentially reverse course and do so in spectacular fashion. If a major sell-off ensues or if market volatility begins to spike again, gold could potentially see significant inflows as investors seek out its perceived safety.

Gold May Now Be in a Win/Win Situation

There are currently many market dynamics at work that could influence global financial markets and the war over trade is a big one. The gold market now seems to have upside potential whether a deal is done or not and may also start to more-heavily weight other factors. The Fed could potentially move markets through its policy decisions in the months ahead. The effects of tax cuts and government spending may be fading, and stocks could begin to struggle without any fresh, bullish catalysts.

With little to no inflationary pressures in the marketplace, the dollar could potentially start working its way lower. From an objective point of view, numerous issues currently have the potential to fuel the next major bull market in gold, and the trade war is really just one of many.

Market Reaction

The gold market has been moving higher in recent months but has yet to complete a sustained upside breakout. After challenging resistance around the $1,340 area back in February, the market failed and saw a moderate sell-off back down to support in the $1280-$1290/oz area. The market found willing buyers on the dip, however, and has since come roaring back to reclaim previous resistance at $1,300.

Today, the market is sitting just above this level at $1,301/oz and appears to be coiling up, possibly readying for another leg higher. Looking at the bigger picture, the market may simply be in a holding pattern until more clarity is seen both on the trade war front and the Fed’s plans regarding monetary policy.