15 Oct 2018
By Ranjeetha Pakiam, Bloomberg:
Gold is set to surge over the next year as concerns deepen about the widening U.S. budget deficit and a tariff-driven trade war starts to damage the country’s economy, according to Bank of America Merrill Lynch.
Bullion could average $1,350 an ounce in 2019 as corporate tax reforms worsen the U.S. fiscal balance, Francisco Blanch, head of global commodities and derivatives research, said in a phone interview last week. Spot gold traded at $1,198.82 on Monday and has averaged about $1,285 this year.
“We’re still pretty constructive longer term on gold,” because of worries over the future of the U.S. economy even though it’s performing relatively well right now, said New York-based Blanch. “In the short run, the effects of strong dollar, higher rates dominate. But in the long run, a huge U.S. government budget deficit is pretty positive for gold,” he said.
The warning over the budget echoes billionaire hedge fund manager Ray Dalio, who predicted this month that the U.S. economy is about two years from a downturn, which will see the dollar plunge as the government prints money to fund a swelling deficit. Goldman Sachs Group Inc. has also joined the chorus of bulls, seeing gold at $1,325 in 12 months. Bullion has been building a base around $1,200, after five months of losses, the worst run since 2013.
The Congressional Budget Office has predicted the U.S. administration’s tax cuts, when combined with new federal spending, will push the budget deficit to $1 trillion in 2020. That’s forced the U.S. Treasury to lift note and bond sales to levels last seen in the aftermath of the recession that ended in 2009.
The tax changes are lowering the revenue base, said Blanch. “That means the Treasury has to borrow more so that puts pressure on rates, which in the short run has not been good for gold,” he said from Hong Kong. “However, in the long run, it basically begs the question, can this go on for much longer? Can the U.S. borrow its way out of the next downturn and at what cost?”
In the near term, the Federal Reserve is the main driver in determining gold’s path. While an interest rate hike is widely expected at this week’s policy meeting, the market will scrutinize the statement from the Federal Open Market Committee for any concerns about the threat to U.S. growth posed by trade tensions, which could change tightening expectations, Blanch said.
The U.S. imposed new duties on $200 billion in Chinese goods on Monday, with Beijing warning President Donald Trump his threats of further tariffs are blocking any potential negotiations. Trump has threatened duties on a further $267 billion of made-in-China products, and signaled the trade war won’t end any time soon, telling Fox News it’s time to take a stand on China.
“Eventually the trade wars are going to come back to bite the U.S.,” said Blanch. “It could take longer, it could take shorter, eventually it’s going to happen, but maybe the Fed acknowledges it sooner, which is what people are going to be looking for in terms of getting more bullish on gold. We know that trade wars are not good for the economy.”
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