Gold prices have largely trended sideways since the end of April. Not only that, but volatility has also shrunk, with the yellow metal trading in an increasingly narrow range. It’s a dramatic change from the over 30% rise in the first four months of the year. The situation seems to be reaching a point where gold prices have to move. So, are the fundamentals to back it up? And which direction will it go?
The two main catalysts are the persisting tariff war and the Fed. However, those two factors have been at odds. The increased economic uncertainty helps support gold prices. But the Fed keeping interest rates elevated puts downward pressure on gold. Now, it seems, the situation might be reversed, with both factors again playing against each other. If the trade situation is resolved, and the Fed finally gets around to easing in the coming months, will the trend reverse?
The Dollar Factor
The other thing to keep in mind is the depreciation of the dollar, which has lost 10% of its value since the start of the year when compared to a basket of currencies. Though, the majority of that basket is made up of the Euro. The recent trend to sell dollars and buy Euros (almost like a reverse carry trade) has an impact on the market’s appetite and valuation of gold.
A weaker dollar would typically support the price of any asset that is priced in it, and that includes gold. The global move towards de-dollarization is struggling to find a viable alternative besides the traditional yellow metal. This has helped support demand, as central banks stock up in the face of geopolitical threats.
Tariff Demands
Traditional economics dictates that tariffs strengthen a currency, by making importing goods less financially viable. This decreases the amount of the currency that is sold, which increases the proportion of demand. But Trump’s start-and-stop tariff policy has had the opposite effect of weakening the dollar. And this led to lots of people buying gold at the start of the year, pushing up the price. So much gold was bought in the US, as a matter of fact, that it was one of the factors pushing US GDP into the red.
But now the market is getting accustomed to the tariff situation. And if deals are reached on trade, then the risk that drove the increase in gold inventories could reverse. That might make some gold bugs a bit nervous, which is why the price has been treading water ever since trade negotiations began.
What About the Fed?
It’s no secret that Trump wants lower interest rates, and lower rates typically make gold a more attractive investment. But, the efforts to achieve those lower yields in the short term are raising uncertainty, and might actually be pushing rates higher. Efforts to undermine the independence of the Fed, for example, make traders nervous. But Powell’s term will be up in less than a year, at which point this will become a moot point.
In fact, yields on Treasuries have been on the rise lately, given economic uncertainty. This means gold lost some of the upward push that it felt at the beginning of the year. If Trump does finally get his way on interest rates, and keeps up the uncertainty on tariffs, then gold prices might just get another boost.