To be able to make an educated guess on how long this Tariff debacle will last and what developments may unfold down the line, it is first imperative to understand the motives of the main characters in the story - and that is the problem the market is grappling with; what exactly is Trump after?
If it were as simple as to reduce the trade deficit US has with China, then it is arguable that the trade deal would likely have been inked in May already. China was making the right steps to accommodate Trump, but was eventually deemed to be guilty of over-negotiating terms of the trade deal on the table. Now in June, China faces the prospect of paying 25% tariffs on $250bn worth of exports into the US.
US-China trade tensions might then be attributed to an arms-race between two of the world's largest superpowers. Technology is power in our modern era, and China's crown-jewel Huawei was making rapid progress towards developing 5G capabilities and Semiconductor production. 5G infrastructure and network would open up a whole new host of possibilities including driver-less technology, drones etc.
And now, enter Mexico, which could not be faulted for thinking it has made peace with the Trump administration via the renegotiation of the NAFTA agreement. Talk on building that wall has died down, and now the country finds itself being slapped with 5% tariffs on its exports, which could potentially rise to 25% if it does nothing about the rise of illegal aliens crossing over to the US. Nothing to do with a Tech arms race here, but Trump's hawkish stance towards the US' trade partners have seen his popularity rise ahead of elections in 5 November.
What can be said is that Trump's trade policies are borne not solely out of economic reasons - as seen with Mexico's case. Even with China, Trump seems to be playing for more than simply reducing the trade deficit, and this should be disconcerting to market investors. The randomness and unpredictability at which Trump is switching targets creates a very uncertain and unstable macroeconomic environment.
On back of tariff madness in the month of May, gold (GLD) has turned higher and recaptured the 1,300 handle. 1,375 is the resistance to break, as the level has capped prices for the bulk of the past 5 years. Unpredictability in Trump's actions will likely continue to crimp investor risk sentiment, and I believe this should result in gold breaking the 1,375 in the weeks to come.
In my other articles, I have detailed how the US Fed has dramatically paused its rate hike programme this year after embarking on 4 rate hikes last year. Interest rate futures now see 36% probability of 2 rate cuts by the end of this year, and Fed vice-chair Richard Clarida has poured fuel to the fire recently by stating the central bank will keep its door open to rate cuts if the global economic outlook dims.
The next Fed meeting on June 18-19 will be crucial, and there is a good probability the central bank will continue to build on its dovish rhetoric by expressing concern over the uncertain macroeconomic situation - ironically made uncertain by the country's own president. If so, I would expect the USD (UUP) (USDU) to continue to weaken against XAU.
My advice is to buy XAU/USD at market (1,305), with a take profit target at the 1,375 resistance. Stop loss should be placed at 1,260.
Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.