In a significant development impacting global financial markets, the imposition of tariffs by US President Donald Trump has led to a notable decline in Gold prices (XAU/USD). The tariffs, targeting Canadian and Mexican imports alongside a 10% levy on Chinese goods, have exerted downward pressure on the precious metal. As a result, Gold prices have experienced a sharp fall, currently trading around the $2,785 region, marking a nearly 0.60% drop for the day.
Gold, often considered a refuge during economic uncertainty, is influenced by myriad factors, including central banks' holdings. Notably, central banks from emerging economies such as China, India, and Turkey are significantly increasing their Gold reserves. These countries aim to diversify their assets and reduce their reliance on traditional reserve currencies such as the US Dollar and US Treasuries, both of which have an inverse correlation with Gold.
The recent economic data from the US Commerce Department further complicates the landscape for Gold. Inflation closed out 2024 on a robust note, with consumer spending surging in December. The Personal Consumption Expenditures (PCE) Price Index rose to 2.6% year-over-year in December from 2.4%, while the core gauge climbed 2.8%, aligning with November's reading and consensus estimates.
As investors digest these developments, market sentiment indicates that the Federal Reserve (Fed) is expected to lower borrowing costs twice by the end of 2025. This potential reduction in interest rates could bolster Gold prices, as lower rates typically enhance the appeal of non-yielding assets like Gold.
The upcoming release of the ISM Manufacturing PMI later today will be a critical factor in determining the near-term trajectory for Gold. Economic indicators such as these provide insight into manufacturing activity and can influence investor sentiment towards Gold.
US Treasury Secretary Scott Bessent has commented on the inflationary nature of tariffs, noting their role in strengthening the US Dollar. This strengthening of the Dollar further impacts Gold prices due to their inverse relationship.
Meanwhile, the EUR/USD pair continues its downward trend, trading around 1.0230 during the Asian session on Monday. The currency pair's performance is closely monitored as it reflects broader economic trends that can indirectly influence Gold markets.
Gold's price dynamics are also shaped by interest rates. Typically, Gold tends to rise with lower interest rates as it becomes more attractive compared to interest-bearing assets. Conversely, higher borrowing costs can weigh down on the yellow metal.