The gold market is feeling the pressure from surging momentum in the U.S. dollar as the trading week kicks off and the world adjusts to America’s trade with Mexico, Canada, and China.
However, although the gold market started the Asian trading session and the new week with some selling pressure, the precious metal is down less than the U.S. dollar has rallied.
April gold futures are trying to hold initial support, last trading at $2,808.90 an ounce, down 0.92% on the day. At the same time, the U.S. dollar index has jumped solidly above 109 points and is up 1.27% on the day.
According to some analysts, despite some selling pressure, gold remains an attractive safe-haven asset as President Donald Trump’s tariffs have spooked equity investors. S&P 500 futures are down 113 points, or 1.87%, last trading at 5,956 points.
The selling pressure comes after the U.S. followed through with its threat and placed a 25% tariff on imports from Mexico and Canada on Saturday. The U.S. also placed 10% tariffs on goods coming from China.
In retaliation, the Canadian government placed 25% tariffs on $30 billion worth of American goods coming into Canada as of Tuesday. The Canadian government is also prepared to increase its tariffs to another $125 billion worth of American imports in three weeks’ time.
Meanwhile, Mexico has said that it is preparing to place a 25% tariff on American imports and is expected to release its list on Monday.
China has not made any retaliatory moves against the U.S. but said it is taking its case to the World Trade Organization.
Commodity analysts have said that the gold market could see some volatility in the near term as the precious metal remains caught in a tug-of-war as a safe-haven asset and due to its negative correlation with the U.S. dollar and higher U.S. interest rates.
Analysts have also noted that gold remains an attractive global alternative currency as the U.S. weaponizes its economy to support the domestic manufacturing sector.
However, economists note that increasing tariffs on imported goods will drive inflation higher, forcing the Federal Reserve to end its easing cycle sooner than expected.
Markets have already started to shift their expectations for the U.S. central bank to leave interest rates unchanged through 2025 if the trade war lasts longer than expected.
“The resulting surge in U.S. inflation from these tariffs and other future measures is going to come even faster and be larger than we initially expected. Under those circumstances, the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut,” said Paul Ashworth, Chief North America Economist at Capital Economics, in a note late Saturday.
Fixed-income analysts at TD Securities said they do not expect the Federal Reserve to do anything with interest rates through the first half of the year. They noted that there is still a lot of uncertainty regarding the economic impact the tariffs will have.
“We still think that the Fed’s first line of defense is to maintain the current restrictive policy posture. In other words, continue to postpone planned rate cuts if necessary. The nature of the tariff shock is clearly stagflationary—a negative supply shock. The economy will first experience the rapid impact on consumer prices but, at the other end, the more gradual drag on growth will eventually become visible. We assume a reduction of 0.2-0.3 percentage points from GDP growth over the next year. Fed officials will need to judge which impact is likely to dominate in the medium term. The optimal policy answer is ambiguous,” the analysts at TDS said. “Our long-held view has been that the Fed will keep rates steady through the first half of the year, as it observes the likely one-off shock to the price level stemming from new tariffs. The knee-jerk reaction from long-term inflation expectations is to rise, but then to moderate, in our view.”
Meanwhile, economists and analysts expect that Canada could face a recession the longer the trade war lasts.
In a recent interview with Kitco News, George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, said he expects gold to continue to perform well as investors hedge against the rising inflation threat. He added that it is unlikely the Federal Reserve will be able to keep inflation under control, which will ultimately weaken the U.S. dollar.
Milling-Stanley also noted that the trade war could drive central banks to increase their gold reserves further and diversify away from the U.S. dollar, as nations—especially in emerging markets—seek to reduce U.S.-induced economic shocks.
