Gold is expected to reach $2,900 amid uncertainty caused by Trump’s policies.
US service sector businesses are cooling, indicating a continued economic slowdown.
Fed officials are uneasy about Trump tariffs, putting inflation ahead of employment.
Gold is expected to extend its gains, rising more than 0.90% on Wednesday, driven by a weaker dollar and lower U.S. Treasury yields. The escalation of the U.S.-China trade war has investors flocking to gold’s safe-haven appeal, with gold/dollar trading near $2,870, with bulls targeting $2,900.
U.S. President Donald Trump’s rhetoric and policies continue to push investors toward gold, which is in uncharted territory. Traders are eyeing the $2,900 mark. Economic data showed that the ADP employment change report for January showed that private companies hired more people than expected and the labor market remained solid.
However, not everything was positive on the data front. Business activity shown by S&P Global and the Institute for Supply Management (ISM) showed that the service sector was cooling.
Meanwhile, Federal Reserve (Fed) officials said they were uncertain about the impact of tariffs on inflation. However, Chicago Fed President Austan Goolsbee said it would be a mistake to ignore the potential impact of tariffs.
"If we see rising inflation or stagnation of progress in 2025, the Fed will face a difficult situation of trying to figure out whether inflation is from overheating or from tariffs," Goolsbee said.
Given the uncertainty that Trump will postpone 25% tariffs on Mexico and Canada for 30 days, but impose 10% tariffs on China, investors are uneasy about possible disruptions to global trade. As a result, they continue to seek the safety of precious metals and abandon the US dollar.
The US dollar index (DXY), which tracks the performance of the US dollar against six currencies, fell 0.38% to 107.58 after hitting a three-week high of 109.88. The US 10-year Treasury yield plunged more than nine basis points to 4.244%. US real yields, which move inversely to gold prices, fell three basis points from 2.10% to 2.07%, which is positive for gold/dollar. In January, the US ADP National Employment Change report showed an increase in private sector payrolls from 176K to 183K, beating expectations of 150K. Meanwhile, the ISM Services PMI for January was recorded at 52.9, slightly higher than the expected 52.8, although down from 54.0 in December. In addition, the S&P Global Services PMI fell from 56.8 to 52.9, still higher than the expected 52.8. Money market federal funds rate futures expect the Fed to cut interest rates by 52 basis points (bps) in 2025.
After setting a new all-time high of $2,882, gold is expected to challenge $2,890 before the psychological level of $2,900. Momentum remains bullish and although the relative strength index (RSI) has entered the overbought zone, it has not yet reached extreme levels above 80, which may pave the way for a mean reversion trade.
On the other hand, if gold falls below the $2,800 mark, the first support will be the January 27 swing low of $2,730, followed by $2,700.
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 jewellery, 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.