After a high point of $3,309 on Thursday gold prices had a sharp drop on Friday, sinking to almost $3,290 in the European trading session. The US dollar, which jumped after a US Appeals court issued a temporary stay on the tariff ban. This overshoot has contributed to the recent correction in the market. With clouds hanging over trade policies and their effects on the U.S. economy, gold’s short-term direction looks to be on shaky ground.
Gold prices are experiencing a test as they hang just above a short-term daily upward-sloping trendline. As of now, they are trending just above $3,335. Technicians are observing that the shiny metal continues to bounce around the 20-day Exponential Moving Average (EMA). This EMA now trades just under $3,290. This bookend leaves gold’s very short-term prospects looking bleak and even more uncertain.
Central Banks Increase Gold Reserves
In contrast to the volatility in gold prices, central banks from emerging economies such as China, India, and Turkey have been rapidly expanding their gold reserves. In 2022, combined, these banks added a whopping 1,136 tonnes of gold to their reserves or well over $70 billion at today’s prices. This marks the largest year of gold purchases on record, highlighting a key trend between two major economic powers around the globe.
As a result, central banks have been increasing their gold purchases at an astonishing pace. These developments provide strong underpinnings to support gold price, even as geopolitical and economic developments play havoc with market forces. Even analysts who aren’t big gold bulls are watching gold’s every move nervously. In particular, they think that the May 7 high of about $3,440 will be an important resistance point. Conversely, the low recorded on May 15 at $3,120 will act as key support as market participants navigate this uncertain landscape.
Uncertainty Surrounding Trade Policies
These latest developments with tariffs have certainly played a role in the recent volatility of gold prices and the general market as a whole. In March 2018, then-President Donald Trump announced across-the-board reciprocal tariffs on all trading partners. A US court of International Trade eventually ruled those tariffs illegal and they were rescinded. The court held that deep trade deficits do not count as a “national emergency.” Under the International Emergency Economic Powers Act (IEEPA), this ruling is unprecedented.
Peter Navarro, former Washington negotiator, now in dire legal straits, but unbowed. He argues, “We’re not going to [lose in federal court], you can bet that even if we lose in court, we will go after tariffs, but not through the courts. This sentiment is representative of the heightened confusion over the direction of Trump’s tariff policy and what it means for US industry.
Supply side Chicago Fed Bank President Austan Goolsbee recently highlighted the chilling effect of uncertainty on economic activity. He articulated that when individuals can’t count on stable policy, they are encouraged to pump the brakes and delay making moves. Real challenges for policymakers ahead They need to be set thoroughly aware of the difficult and sordid relationship between trade agreements and our domestic economic prosperity.
Implications for Economic Policy
This is all happening amidst a tariff storm that has brought policymakers closer than ever to considering cuts to interest rates. Goolsbee indicated that if tariffs could be avoided through negotiations or other means, there may be room for lowering interest rates. This would serve to jumpstart economic activity hampered by trade-related uncertainties.
Perhaps most recently, President Biden’s temporary lifting of the ban on Trump’s tariffs has added to the turmoil and uncertainty for businesses and investors alike. Elevated uncertainty surrounding trade policies continues to hinder confidence among US businesses, which may impact their investment decisions moving forward.