Trade war tensions are on the rise just as concerns over the health pandemic have started to ebb, which should continue to hold a bid under gold prices over the short-term supported by the bullish cocktail of economic, trade, and geopolitical factors.

Beijing dropped the references to its annual growth target for the first time at the beginning of Parliament, which is signalling more economic uncertainty and reinforced gold demand.

Gold could maintain gains in the face of a firmer US dollar because both are viewed as ‘safe havens.’

Physical uptake has been slow of late, but regional Asian hubs reportedly had an uptick on demand last week, possibly on the back of rising US trade tensions.

Gold ended the week slightly lower from the week before despite a rise in geopolitical tension in Hong Kong and a hefty chunk of trade war risk premium getting packed into the overall equation. This could be due to the futures rollover date as no one wants to take delivery of physical with demand low.

The market, if exceptionally long gold futures, either as a speculative bet or as a hedge to cover the enormous build in Gold ETF. And with moderate demand for physical, funds will be forced to roll Jun/August, where I would expect the roll spreads to widen. The discount of the most-active futures to the second most active has already swelled to the biggest since 1981 on Thursday. It is a sign that more buyers want to roll into later contracts rather than take physical delivery of the metal.

Gold ETF

Investors on the advice of financial advisers and probably convinced by some Wall Street guru getting media space in tier one publications have poured unprecedented amounts of cash into gold exchange-traded funds.

Sadly, most of these investors remain blind to the volatility in gold, lack of liquidity in COMEX, its correlation to deflation, or the fact that gold is not as safe a haven hedge for stocks as gold ETF promoters preach.

It is bizarre how the social media narrative runs that the new wave of gamblers investing in the relatively low volatility stock markets is risky, but betting on gold in a higher stakes game as far as volatility is concerned is okay.

With the regulators’ footprint all over the USO oil ETF, I wonder how long it will be before they stamp down on Gold ETFs. The scary thing is that now retail investors are the perma bid on gold markets via gold-backed EFT.

Currency markets

Absent a clear directional bias for the dollar, which is shifting on the ebb and flow of risk markets, traders continue to tread lightly. They will step even more gingerly today, given the many holidays around the world given the lack of liquidity in primary markets. With central banks now basically de facto government financing vehicles, with inflation targeting is just a façade, it’s virtually impossible to use Central Bank guidance in the currency outlook equation.

Asia traders will continue to focus on the Yuan, which is the primary benchmark for local risk markets (Asia) and the all vital trade war barometer for global markets.

The Yuan watch

There are mounting tensions on multiple fronts, trade tensions notwithstanding. In mainland China, news from the first day of the NPC suggested regulators were far lest dovish than market positioning mostly because the group decided not to set a GDP growth target for this year. And other goals for government support was more foggy than usual.

All of which suggests there will be a lingering bid in USDCNH likely for weeks to come. But if China and even HK stocks turn a darker shade of red and with USDCNH breaking through the key 7.15, it suggests the risks remain skewed to the topside as markets price a higher risk premium on trade war risk, potentially leading to further portfolio outflows.

FX & Gold markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp