Ravindra Rao
Gold remained volatile for the last few days, with the price moving to a 2013 high of $1,611.42 an ounce and then falling more than 4.5 percent to $1,536 an ounce, all within five trading sessions. The metal has now steadied near $1,550, as market players assess the US-China trade deal.
After months of negotiations, the US and China on January 15 signed the phase 1 of a trade deal which includes intellectual property protection and enforcement, ending forced technology transfer, removing barriers to American financial services, ending currency manipulation, effective dispute resolution and increased purchases of US goods and services.
China has committed to buying an additional $200 billion of American goods and services by 2021, which includes $52.4 billion of energy goods, $32 billion of agricultural commodities, $77.7 billion of manufactured goods and $37.9 billion of services.
The first question troubling market players is whether China will be able to meet its commitment of higher purchases of US goods and services in such a short span of time. Also, there is uncertainty as to what happens after 2021, as the deal encompasses only two years.
China has already indicated that it may not take the targets stringently. Vice premier Liu He, who signed the deal with US President Donald Trump at the White House, said Chinese businesses will buy American goods and services “based on the market demand in China”.
There is also uncertainty about phase 2 of the trade deal as no timeline has been discussed so far. US Vice President Mike Pence said discussions had begun on a Phase 2 deal but did not more details.
With a large number of differences between the two nations, market players are worried that there may be prolonged talks before a comprehensive deal is reached. Market players are already discussing the possibility that the phase 2 deal may happen only after the US presidential elections in November.
The biggest disappointment is that most of the tariffs may remain in place until the phase 2 deal is signed. With the phase 1 of trade deal, US has suspended plan to impose tariffs on $156 billion worth of Chinese goods and also reduced the tariff rate to half from 15 percent to 7.5 percent on levies imposed on about $120 billion in Chinese products. But most of the higher duties, which affect another $360 billion of Chinese goods and more than $100 billion worth of US exports, stay.
Overall, the signing of the trade deal is a positive development but the prospect of prolonged talks may keep market players nervous about a possible fallout and this nervousness may cause them to seek refuge in gold and other havens.
(The author is VP- Head Commodity Research at Kotak Securities.)
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Source: Money Control
