Gold prices surged on Monday, hitting a record high above $2,900 after US President Donald Trump imposed a 25% tariff on base metals. The non-yielding metal was driven higher by traders seeking safety amid concerns that Trump's trade policies could undermine the global economy and drive inflation higher.
XAU/USD is trading at $2,905, having hit an all-time high of $2,911. On Sunday, Trump said that steel and aluminum imports into the United States would be subject to a 25% tariff, including imports from Canada, the UAE and Mexico. This has boosted gold prices, with bulls finally breaking the $2,900 barrier and targeting $3,000 per ounce.
Despite this, market sentiment remains positive, with Wall Street remaining in positive territory. The dollar also rose with gold, while U.S. Treasury yields remained stable, which usually weighs on precious metal prices.
Gold also benefited from demand from central banks. The World Gold Council (WGC) revealed that banks purchased more than 1,000 tons of gold in 2024, the third consecutive year. Central bank purchases increased by more than 54% year-on-year to 333 tons after Trump's victory, the WGC calculated.
Nonetheless, Federal Reserve (Fed) officials began to be slightly cautious, which prevented gold prices from rising significantly. Federal Reserve Chairman Jerome Powell's testimony before the US Congress will be closely watched by traders. Any hawkish hints could weigh on gold.
The US economic calendar will include Fed speakers, inflation data, employment data and retail sales.
Gold's uptrend will continue unless there is a daily close below $2,900, which could pave the way for a pullback. Momentum remains bullish and the relative strength index (RSI) is overbought, although bulls can still push prices higher as long as it remains below the extreme reading of 80.
The next resistance will be the psychological level of $2,950, followed by $3,000. Conversely, if XAU/USD falls below $2,900, the first support level will be $2,850, followed by the October 31 high of $2,790. Further weakness will be seen at the January 27 low of $2,730.
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 viewed as 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 because 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 trust in a country's solvency. According to the World Gold Council, central banks added 1,136 tonnes of gold to their 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 US dollar and US Treasuries, both of which are major reserve assets and safe haven assets. Gold tends to rise when the dollar weakens, allowing investors and central banks to diversify their assets during turbulent times. Gold is also negatively correlated with risky assets. A rally in the stock market tends to push gold prices lower, while a sell-off in riskier markets tends to favor gold.
Prices can move due to a wide variety of factors. Geopolitical instability or fears of a deep recession can 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 moves 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.