By Rania Gule – Gold (XAU/USD) has seen a significant decline at the start of trading today, Monday, dropping to around $3,286 after reaching record highs last week.
This pullback, in my opinion, reflects the market’s reaction to global economic variables, particularly concerning the trade relations between the United States and China. Growing optimism about the improvement of these relations, following positive comments from U.S. Agriculture Secretary Brooke Rollins about daily talks between the two countries regarding tariffs, led investors to reduce their positions in gold as a haven. This shift in sentiment has negatively impacted investor appetite for safe-haven assets like gold, causing it to drop below the $3,300 level, a noticeable decline after last week’s record highs.
However, gold remains a haven for investors during times of economic uncertainty, suggesting that this decline may be temporary. While the trade relationship between the U.S. and China is a key driver of risk appetite in the markets, there are still concerning factors at the global economic level that could support gold’s long-term stability. For example, the announcement by President Donald Trump in April to impose broad tariffs raised concerns about a slowdown in U.S. economic growth, which could increase demand for gold as a hedge against economic recession. Additionally, the warnings from the International Monetary Fund about the rising risk of a recession in the U.S. due to the trade war add to this narrative, strengthening expectations that gold will remain in focus as a safe-haven asset amidst unstable economic conditions.
With major economic reports scheduled for release this week, such as the U.S. GDP for Q1 and the April employment report, I believe markets will be closely watching to gauge the strength of the U.S. economy. Any downturn in economic data could rekindle momentum for gold and boost its gains once again. Specifically, if the reports show weakness in the U.S. economy, gold will likely rise once more, as investors seek safe havens amid mounting economic pressures. It is also important to note that the relationship between the U.S. dollar and gold will be pivotal in determining the future price trajectory. Despite the gains made by the dollar last week, investors still expect the Federal Reserve to adopt a more dovish monetary policy shortly, which could limit the dollar’s strength and push gold back to higher levels.
Some structural factors affecting demand in the gold market also point to a decline in gold consumption in China, reflecting a decrease in demand for gold jewellery due to rising prices. In my opinion, this reduction in consumption may exert downward pressure on gold prices in the short term. However, there has been a notable increase in the consumption of gold bars and coins in China, indicating that demand for gold as an investment asset remains strong in certain markets. Therefore, while the decline in consumption in China may be a short-term concern, it doesn’t change the fact that gold remains popular as a hedge against geopolitical and economic risks.
Looking at ongoing geopolitical risks, such as the Russia-Ukraine war, markets remain on edge regarding the potential impacts of this crisis on the global economy. Military movements and political statements in this context could lead to further disruptions in the financial markets, potentially supporting demand for gold once again. The war in Ukraine may continue to be a key factor in the markets for an extended period, especially with North Korea confirming its involvement in the conflict for the first time. In my view, these developments increase market uncertainty and push gold back into the spotlight as a haven.
In conclusion, despite the slight decline in gold prices at the moment, it remains likely that it will continue its upward trajectory in the long term if global economic factors continue to exert pressure on the markets. Investors who closely monitor market movements may find good opportunities in gold as a haven amid geopolitical tensions and economic risks. However, it is also important for investors to remain cautious of any sudden shifts in sentiment or economic data that could lead to strong price volatility.
EDITO’S NOTE: The writer Rania Gule is Senior Market Analyst at XS.com – MENA