Gold prices plunged to near $2,985 in early Asian trading on Monday.
Stock market sell-off prompted investors to cover losses.
The growing trade war and geopolitical risks could boost safe-haven demand, which is bullish for gold prices.
Gold prices (XAU/USD) faced some selling pressure in early Asian trading on Monday, around $2,985, under some profit-taking pressure. The precious metal's decline was further exacerbated by the decline in US stocks that prompted traders to close out gold positions to create the necessary liquidity to cover stock market losses.
The sharp sell-off in US stocks on Friday was mainly to raise cash to meet margin calls as US President Donald Trump announced new reciprocal tariffs on goods from many countries. However, gold's downside may be limited due to fundamental support. "Next week, bargain hunters will flock to buy cheap gold and silver, helping precious metals to rebound again," said Rich Checkan, chairman and CEO of Asset Strategies International.
In addition, global economic uncertainty and heightened geopolitical tensions could boost safe-haven inflows, supporting gold prices. Russia shelled more than 30 locations in the Kherson region, including residential areas in Kherson. Oleksandr Prokudin of the Kherson Regional Military Administration reported that seven people were injured. Despite the volatility, "gold remains a safe haven for many investors," said Matt Simpson, senior analyst at City Index.
Gold has played a key role in human history as it is widely used as a store of value and a medium of exchange. Currently, in addition to its lustre and use in jewelry, gold is widely viewed as a safe haven asset, meaning it is considered a good investment in turbulent times. Gold is also widely viewed as a hedge against inflation and currency devaluation 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 rallies 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.