President Trump and President Xi Jinping agreed to halt escalation in their trade conflict. At the same time, the Fed officials became more cautious about the pace of future interest rate hikes. How will the softening of the US trade and monetary policies affect the gold market?

Trade Truce and Gold

Have you heard about the Christmas truce? It was a series of unofficial ceasefires across the Western Front during World War I around Christmas Day in 1914. In that time, men from both sides emerged from the trenches and met in No Man’s Land to exchange gifts, take photos, sing carols and play football. Really. We were also moved. It shows that there might be a moment of peace even during a dreadful war.

Fast forward to Trump’s trade war with China. Of course, and luckily, it has been only a trade dispute, not a military conflict. But the press has been reporting about “trade truce” recently. The analysts refer to the G20 summit in Argentina held over the weekend. During the summit, there was a meeting between Trump and Xi. Both sides agreed to hold off on new tariffs, softening the trade conflict. In particular, the US agreed not to raise tariffs further on January 1st, 2019, as it was planned, while China agreed to buy more agricultural products from U.S. farmers. Moreover, the two sides decided to negotiate over the next 90 days to resolve contentious issues.

On Monday, Trump tweeted:

My meeting in Argentina with President Xi of China was an extraordinary one. Relations with China have taken a BIG leap forward! Very good things will happen,” Trump tweeted on Monday.

Investors also cheered the 90-day ceasefire and the stock markets went up. As a consequence, the US dollar softened, while gold shined, as one can see in the chart below.

Chart 1: Gold prices from November 30 to December 3, 2018.

However, the truce is not the end of the trade fight. All the freshly imposed tariffs are still in place. And 90 days might be not enough to resolve all the problems. So, yes, things look better than a week ago, but the “war” is not over – and the fight might re-escalate. Hence, the recent gains in the gold market might be temporary. Remember Christmas truce in 1914? It was a beautiful time, but the WWI lasted four another long years. You have been warned.

November FOMC Minutes and Gold

Last week, the FOMC published the minutes of its latest monetary policy meeting held in November. Again, the press focused on the dovish signals, i.e. the fact that no one, in contrast to September meeting, mentioned the possibility that the federal funds rate could go above the neutral level.

However, the Fed still opts for gradual tightening of the monetary policy and for the next hike as soon as this month:

Almost all participants reaffirmed the view that further gradual increases in the target range for the federal funds rate would likely be consistent with sustaining the Committee's objectives of maximum employment and price stability.

Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.

It’s true that a couple of participants note that the federal funds rate might currently be near its neutral level, but “a couple” does not mean “all”. And there is a lot of uncertainty about the neutral level rate, which is not, after all, an observable phenomenon. Hence, the Fed wants to put greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook, which is understandable.

Our point is that the press coverage about Powell’s dovish turn is exaggerated. Actually, the FOMC’s assessment of the economic outlook was little changed, and the Committee still expects that the pace of economic growth will remain above trend. If economy expands above its potential, it means that the interest rates are below the neutral level and the Fed will have to raise them. Gold will have to wait for catching its breath. 

Implications for Gold

We love Christmas. But do not overestimate the Magic of Christmas. Politics is and will remain brutal. Perhaps, we will see a deal between US and China, but it’s too early to open the champagne (and some people point to the Thucydides Trap and argue that the re-escalation is coming). Similarly, Powell softened his language (it should not be surprising, given the stock market correction), but he is not a Santa who will put lower interest rates under the Christmas tree. Actually, brace yourself for a hike in December. It might be true that next year will be better for gold, but the current enthusiasm seems to be a bit elevated.