Kitco News - Gold prices were under pressure but still outperformed the S&P 500 as markets reacted to the global trade war. Although gold opened the Asian session and started the new week with selling pressure, the precious metal fell less than the dollar's gains.
April gold futures are struggling to hold early support, last trading at $2,808.90 an ounce, down 0.92% on the day. Meanwhile, the US dollar index surged above 109 points, up 1.27%.
Despite the selling pressure, gold remains an attractive safe-haven asset as tariffs imposed by US President Donald Trump rattle equity investors, according to some analysts. S&P 500 futures fell 113 points, or 1.87%, to 5,956.
Selling pressure intensified after the US implemented a 25% tariff on imports from Mexico and Canada on Saturday. In addition, the US also imposed a 10% tariff on goods imported from China.
In response, the Canadian government imposed 25% tariffs on $30 billion worth of U.S. imports starting Tuesday. Canada is also poised to raise tariffs on $125 billion worth of U.S. imports in the next three weeks.
Meanwhile, Mexico announced it is preparing to impose a 25% tariff on imports from the US and will release a list on Monday.
China has not yet retaliated but said it will bring the case to the World Trade Organization (WTO).
Commodity analysts say the gold market could see volatility in the short term, as the precious metal is caught between its role as a safe-haven asset and the negative impact of a strong dollar and higher US interest rates.
In addition, experts also emphasized that gold remains an attractive alternative currency globally as the US uses economic policy to support domestic manufacturing.
Economists note that increasing import tariffs will push inflation higher, forcing the US Federal Reserve (FED) to end its easing cycle sooner than expected.
Markets have begun to adjust expectations that the US central bank will keep interest rates unchanged until 2025 if the trade war drags on longer than expected.
“The increase in inflation in the US due to these tariffs and subsequent measures will be faster and larger than initially expected. In this context, the possibility of the Fed cutting interest rates in the next 12 to 18 months is almost gone,” Paul Ashworth, chief North American economist at Capital Economics, said in a report over the weekend.
Fixed income analysts at TD Securities believe the Fed will not adjust interest rates in the first half of this year due to uncertainties about the economic impact of tariffs.
“The Fed’s main direction is to maintain its current tight monetary policy. In other words, the Fed can continue to delay its interest rate cut plan if necessary. The nature of this tariff shock is stagflation. The economy will initially see a rapid impact on consumer prices, but in the long term, the impact of slowing growth will gradually become more evident. We forecast that US GDP may decline by 0.2-0.3 percentage points next year. Fed officials will have to assess which factor will dominate in the medium term, and the optimal policy decision is still unclear,” TD Securities said in a report.
Meanwhile, economists and analysts predict Canada could face a recession if the trade war drags on.
In a recent interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that gold prices will continue to hold up well as investors seek protection against rising inflation. He said that the Fed will have a hard time controlling inflation, which will eventually weaken the US dollar.
Milling-Stanley also highlighted that the trade war could prompt central banks to increase their gold reserves and diversify away from the US dollar, as countries – especially emerging markets – seek to cushion the economic shocks inflicted by the US.
