- Gold gains nearly 20% year-to-date due to safe-haven flows.
- Trump’s tariff policies are fueling inflation and recession fears.
- Investors expect three quarter-point rate cuts by the Fed in 2025.
- But regardless of the Fed’s stance, gold may be destined to climb higher.
Tariffs are fueling Gold’s engines
Gold has been the best performing asset year-to-date, gaining nearly 20% and breaking record high after record high. The S&P 500, Treasury yields, and the US dollar are in the red, with Bitcoin suffering even more.
At this point it is worth noting that recently, equities have been positively correlated with the US dollar. The reason why this has been the case is the same reason why gold has been flying sky high, and it is no other than recession fears due to Trump’s tariff rhetoric and policies, as well as the broader uncertainty his policies are generating.
Although reports around a week ago suggested that Trump will adopt a softer and more flexible stance than previously anticipated on April 2, when the reciprocal tariffs are scheduled to take effect, the US President himself said last Wednesday that he is planning to proceed with a 25% levy on imported cars and light trucks on April 3. Duties on auto parts will take effect on May 3. And as if this was not enough, during this weekend, a report hit the wires saying that Trump will consider higher tariffs against a broader range of countries, as he aims at correcting trade imbalances against the US.
Recession fears intensify ahead of “Liberation Day”
Initially, investors were afraid that tariffs would refuel inflation. However, although this still may be the case, they have lately shifted their focus on the impact Trump’s trade policies may have on the world’s largest economy. Following the latest toughening of Trump’s stance, Goldman Sachs is now projecting a 35% probability of a recession in the next 12 months, while the Atlanta Fed has revised down its GDPNow model estimate for Q1 to -3.7%.
The heightening concerns about deep wounds in US economic activity have prompted investors to bring back to the table some of the rate cut bets they recently removed. Currently, they are pencilling in around 75bps worth of additional rate cuts by the end of the year, even though the Fed’s latest dot plot continued pointing to only two quarter point reductions.
And indeed, with the core PCE price index, the Fed’s favorite inflation metric, surging to 2.8% y/y in February, the path of monetary policy from here onwards is far from being crystal clear. The Fed may find itself between a rock and a hard place. On the one hand, they need to safeguard the economy, and on the other, they need to make sure that inflation does not get out of control again.
Gold could continue exploring uncharted territory
Either way, in the current landscape, it may be a win-win situation for gold. If the Fed decides to hold interest rates steady, investors may become even more worried, as high borrowing costs could be an extra drag for the economy. They could then buy more gold due to its safe-haven status. On the other hand, an accelerating rate reduction process may reduce even further the opportunity cost for holding the precious metal, which is again positive.
The fact the Peoples’ Bank of China (PBoC) continued buying gold in February for the fourth straight month may be another important factor underpinning gold. Chinese officials may be willing to continue adding to their reserves in an attempt to further loosen their dependency to the US dollar in order to minimize the economic damages from an escalating trade war between the world’s two largest economies.
Correction is likely, but broader uptrend remains well intact
From a technical standpoint, gold hit a new record high near $3,150 on April 1, before pulling back. The prevailing uptrend remains well intact and very strong, with both the RSI and the MACD pointing to strong upside momentum.
The announcement of tariffs today and tomorrow may result in a “sell the fact” market reaction, but the uncertainty about Trump’s future trade policies may allow the bulls to jump back into the action from near the $3,067 zone, marked by the inside swing high of March 20. If this is the case, a rebound could aim for another test near the all-time high of $3,150, the break of which could allow extensions towards the $3,200 zone. That zone is the 261.8% Fibonacci extension level of the October 30 – November 14 correction.
For the outlook to start shifting to bearish, a decisive dip below the round number of $3,000 may be needed. Such a move would confirm a lower low on the daily chart, as well as the break below the near-term uptrend line drawn from the low of December 30. This scenario may materialize if Trump’s actions turn out to be way softer than what he initially signalled.
