Gold at +10% YTD amid Trade Uncertainty

The Fed is expected to keep its stance on interest rates remaining high for an extended period of time, but gold prices could now be more influenced by trade than policy.

Breaking the Trend

Typically, gold prices move inversely to interest rates as investors lose their appetite for the non-yielding yellow metal when bonds offer better returns. Nevertheless, recent anxieties around the inflationary effects of tariffs and general geopolitical uncertainty surrounding the trade disputes have left traders scooping up gold as a safe haven. Despite technical indicators suggesting that gold prices have reached overbought levels near $2,900 and advanced in early trading this week after seven consecutive weeks of gains, prices remain below the all-time high of $2,945 reached on Tuesday.

The market is expected to closely watch the release of the minutes from the latest FOMC meeting on Wednesday for insights into the next moves for gold. The Fed kept interest rates on hold as widely expected and signalled that they would remain high for an extended period. The minutes, however, will receive additional scrutiny in light of the recent strong employment figures and inflation exceeding expectations. Fed Chair Jerome Powell might have foreshadowed the consensus in his semi-annual testimony before Congress, wherein he essentially stated that there would be no further rate cuts unless inflation and employment data trends change. Bond yields in the US have stabilised somewhat since the release as investors ponder the potential impact of tariffs on the economy and, consequently, interest rates.

What Can Move the Markets

The lower yields received support from the release of January retail sales data on Friday, which showed the largest decline in nearly two years at -0.9%. Although some of this could be attributed to one-off effects, such as the unusually low temperatures and wildfires, the broad range of sectors affected by the decline could be an indication that US consumers are cutting back after four months of strong growth. The data was perceived as dovish, something that President Trump has been vocal in advocating for. After initially pricing out a second rate cut in the wake of the hotter-than-expected inflation data, markets are now marginally pricing in a more than 50% chance that the Fed will cut rates twice this year.

Some analysts suggest that gold could rise to as much as $3,500 per ounce, taking into account the upward pressure from the uncertainty surrounding tariffs and the potential lower interest rates providing further tailwinds. However, tariff threats are still mostly threats, and this uncertainty is helping support gold. As more details emerge about the actual application and content of the tariffs, as well as their real effect on the economy, the markets could adjust.

Pennant Could Propel Prices Past 3K

A pennant pattern may have formed in gold, which could push prices to $3015 per ounce if a breakout above the peak of $2940 occurs. However, if bullish momentum wanes, the pattern could evolve into a triangle, extending the period of consolidation between the peak and $2860.  Below the local support, a breakdown of $2830 could expose lower levels and potentially lead to a deeper correction, likely turning the pattern into a flag pattern.

Source: SpreadEx / Gold

Key Takeaways

While the Fed is expected to keep interest rates high for a longer period, gold prices could be influenced more by trade dynamics as details about the potential impact of tariffs come to light. The current uncertainty surrounding tariffs and potential inflationary effects has prompted investors to seek the safe haven. Nonetheless, the actual implementation and impact could lead to adjustments in rate expectations, eventually altering the trajectory of gold prices.