Gold prices were on the upswing for the second day running, supported by a range of favorable forces at play in the market. In the early European session Thursday, gold (XAU/USD) traded below the $3,320 level. It even kept a modest positive bias after cutting some of its meager intraday advance. Resilience continues to be on display in the shadow of variable US dollar strength. Falling bond yields have contributed, changing the investment calculus in favor of this shiny metal.
The backdrop of increasing uncertainty and volatility around US monetary policy and trade relations has added to the mix. Take US President Donald Trump, who last week announced dangerous new tariffs that have created significant market uncertainty. This has resulted in a very challenging backdrop for gold prices. As traders react to these conflicting signals, the short-term outlook for gold is still optimistic but potentially impacted by volatility.
Factors Supporting Gold Prices
Gold prices have shot up immensely largely thanks to an unprecedented set of positive market catalysts. Further helping the precious metal, the US dollar index is deep into a retracement slide from a two-week high. The recent decline in the dollar’s value increases gold’s attractiveness. Industry insiders and investors alike view it primarily as a safe-haven asset, especially in times of economic tumult.
Declining US bond yields have played a role in the bullish sentiment surrounding gold. As bond yields fall, gold’s lack of yield becomes less relevant and therefore more attractive. Investors immediately begin searching for alternatives that enable them to preserve their interest income. Market participants are increasingly placing bets on future Federal Reserve rate cuts. This trend definitely adds to gold’s bullish case.
Lingering trade hostilities have increased gold’s appeal as a hedge. The uncertainty stemming from these trade issues has prompted many investors to look towards gold as a hedge against potential economic fallout. As geopolitical risks remain front of mind, demand for safe-haven assets such as gold are likely to be well supported.
Technical Analysis and Price Vulnerability
Despite its recent bullish run, gold prices are not without weaknesses. Technical indicators show that the precious metal is likely to face resistance. This resistance is expected to be found at the 100-period Simple Moving Average (SMA) on the 4-hour chart, which is now around $3,335 area. If gold can’t get above this, it might not be able to get too far above with upward momentum.
MarketWatch notes that analysts have cautioned that a sustained weakness below the $3,300 floor could spell even more pain. Such a movement would be enough to set off a bearish drop back to the overnight swing low around $3,283-3,282. This would raise the concern of a possible retest of July’s monthly swing low near $3,248-3,247. Gold market participants are watching these levels very closely as they look to signal forthcoming breaks higher or lower in gold prices.
Alternatively, if gold can punch above the $3,358-3,360 resistance zone, we might witness a short-covering rally. With continued momentum, prices could soon come within the range of the key psychological milestone of $3,400. This rosy picture relies on continued goodwill from the market and the ability to clear a few technical obstacles.
Influence of Trade Policies on Market Sentiment
The lingering trade policies implemented by US President Donald Trump very much continue to color market conditions and mood among investors. Most recently, he declared a 50% tariff on imported copper. This decision, set to go into effect on August 1, muddies the economic landscape even more. His administration has already released tariff notices against eight small trading partners. That likely means no more extensions for the handful of countries that were issued these notices.
These type of aggressive trade measures are cause for concern amid already rising inflationary pressures in the United States. Policymakers from both sides of the aisle are rightfully concerned about the negative impact these tariffs are having on broad economic growth and consumers’ pocketbooks. As inflation expectations increase, investors tend to gravitate towards gold as a safe haven against currency devaluation and economic uncertainty.
For one, Trump says that any retaliatory tariffs will be added on top of existing US tariffs. This confusing statement only heaps further confusion on an already complicated issue. With trade war fears still bubbling to the surface and inflation worries taking their toll, traders will continue to act skittishly in this environment.