Gold prices are strongly supported by uncertainty over Trump's aggressive trade policies.
Fed rate cut bets further favor gold, though a slight recovery in the dollar limits further gains.
Improved global risk sentiment will further encourage caution among XAU/USD bulls.
Gold prices (XAU/USD) entered a bullish consolidation phase and moved in a narrow range near all-time highs during the Asian session on Friday. Investors are concerned about US President Donald Trump's aggressive trade policies and their impact on the global economy, which in turn continues to support demand for safe-haven gold. Apart from this, bets on further monetary easing by the Federal Reserve (Fed) have also become another positive factor for non-yielding gold.
However, the third consecutive day of US dollar (USD) buying and a slight improvement in global risk sentiment kept gold prices below the psychological level of $3,000. Moreover, the overbought condition on the weekly chart seemed to hinder bullish traders from making fresh bets on the XAU/USD pair. Nevertheless, the precious metal is still on track to record strong gains for the second consecutive week, and the fundamental backdrop supports the prospects of further gains.
US President Donald Trump has stepped up the tariff war, saying he will impose a 200% tariff on European wine and brandy imports if the European Union does not remove its additional tax on American whiskey. Trump earlier threatened that he would respond to any countermeasures announced by the European Union.
This is on top of Trump's 25% tariffs on all steel and aluminum imports, which took effect on Wednesday, further heightening the risk of an escalation in the tariff war between the United States and its major trading partners and pushing safe-haven gold prices to a new high on Friday.
Traders have increased bets that the Federal Reserve will have to cut interest rates this year as the Trump administration's aggressive policies have raised the possibility of a recession. These expectations were boosted by weak U.S. inflation data this week.
In fact, data released on Wednesday showed that the U.S. Consumer Price Index (CPI) rose 2.8% year-on-year in February, lower than expected, and 3% in the previous month. In addition, the core index fell to 3.1% from 3.3% in January.
In addition, the U.S. Producer Price Index (PPI) remained unchanged in February, slowing to 3.2% on an annual basis from 3.7% in January. This suggests that U.S. inflation pressures have eased, which, together with a cooling U.S. labor market, supports the prospect of further easing by the Federal Reserve.
Traders currently expect the Fed to cut interest rates by 25 basis points each at its June, July and October monetary policy meetings. This in turn is seen as another factor supporting non-yielding gold, although multiple factors have limited further gains.
Global risk sentiment received a slight boost from some positive comments from the White House and Canadian officials. Ontario Premier Doug Ford said that a meeting with US Commerce Secretary Howard Lutnick reduced tensions in the ongoing trade war.
Meanwhile, the US dollar index (DXY), which tracks the greenback against a basket of currencies, recovered for the third consecutive day from its lowest level since October 16. This further limited the commodity's upside during the Asian session.
Traders now look forward to the preliminary release of the Michigan US consumer confidence and inflation expectations index for short-term opportunities. Market focus will then turn to the two-day FOMC monetary policy meeting starting next Tuesday.
From a technical perspective, this week's breakout above the $2,928-2,930 horizontal resistance and the subsequent breakout above the previous all-time high of around $2,956 can be seen as a new trigger for the bulls. Nonetheless, the relative strength index (RSI) on the daily chart remains close to overbought territory, so it would be wise to wait for some short-term consolidation or a modest pullback before the next leg higher. However, the overall setup suggests that the path of least resistance for gold prices remains to the upside and supports the continuation of the nice uptrend that has been in place for nearly three months.
Meanwhile, any meaningful corrective decline is more likely to attract new buyers around $2,956, below which the price could fall to the $2,930-2,928 horizontal resistance breakpoint, now turned support. The latter should serve as a key turning point, a break below which could trigger some technical selling, paving the way for deeper losses. The XAU/USD pair could accelerate its decline towards the $2,900 round mark and, in turn, the $2,880 area, or the weekly low hit on Tuesday.
Gold has played a key role in human history as it is widely used as a store of value and medium of exchange. Currently, in addition to its lustre and use in jewellery, gold is widely considered a safe haven asset, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency debasement as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to boost perceptions of economic and monetary strength. High gold reserves can be a source of confidence in a country's solvency. According to the World Gold Council, central banks added 1,136 tons of gold reserves in 2022, worth about $70 billion. This is the highest annual purchase on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is negatively correlated with the U.S. dollar and U.S. Treasuries, both of which are major reserve assets and safe havens. Gold tends to rise when the dollar depreciates, allowing investors and central banks to diversify their assets during turbulent times. Gold is also negatively correlated with risky assets. Stock market rebounds tend to push gold prices lower, while sell-offs in riskier markets tend to benefit gold.
Prices can move due to a wide variety of factors. Geopolitical instability or fears of a deep recession could quickly push gold prices higher due to its safe-haven status. As a low-yielding asset, gold tends to rise as interest rates fall, while higher funding costs usually weigh on gold. Still, since the asset is priced in U.S. dollars (XAU/USD), most movements depend on the performance of the U.S. dollar (USD). A strong dollar tends to control gold prices, while a weak dollar can push them higher.