Gold strengthens as Trump retaliates against China’s export control on rare minerals
- Gold price refreshes ATH above $3,300 as US President Trump plans to reduce dependency on China for critical minerals.
- Investors doubt the credibility of the US Dollar due to Trump’s abrupt decision on international policies.
- Fed Powell is expected to provide fresh guidance on the monetary policy outlook.
Gold price (XAU/USD) extends bullish momentum and posts a fresh all-time high (ATH) near $3,318 during European trading hours on Wednesday. The precious metal remains an attractive investment amid heightening global trade tensions. The intensifying trade war between the United States (US) and China has forced financial market participants to stay on the safe-haven fleet, assuming that the tussle for dominance between them is painful for the global economy.
The tariff war between the world’s largest powerhouses has escalated further as US President Donald Trump ordered his team on late Tuesday to probe into potential new tariffs on all imports of critical minerals, in an effort to reduce their dependency on China. US dependency on minerals imports "raises the potential for risks to national security, defense readiness, price stability, and economic prosperity and resilience," Trump said in the order, Reuters reported.
Donald Trump has taken a step to reassess levies on vital minerals after Beijing announced a non-tariff barrier on their exports by establishing a licensing system. Earlier this month, Beijing also imposed export restrictions on six heavy rare earth metals and rare earth magnets.
Market experts worry that the US economy could be vulnerable without these minerals, as they barely produce them, given their application in many industries, including defence and technology.
Beijing has imposed restrictive controls on exports of rare minerals to the US in retaliation for hefty reciprocal tariffs imposed by Donald Trump on them. Till now, the US has raised additional duties on Chinese imports to 145%. At the same time, China has also imposed 125% tariffs on US imports. Meanwhile, Trump has declared a 90-day pause on reciprocal tariffs for the rest of his trading partners.
Daily digest market movers: Gold outperforms amid weakness in US Dollar
- A sharp upside in the Gold price is also driven by sheer weakness in the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 99.50, holding near its lowest level in three years. Technically, weakness in the US Dollar makes the Gold price an attractive bet for investors.
- The US Dollar has been facing an intense sell-off as investors worry that the US-China trade war is more painful for the US economy than it is for the rest of the world.
- Market participants expect that substitutes of Chinese products available in the US economy are incapable of matching the price and quantity in a short span of time due to the absence of manufacturing facilities and a low-cost competitive advantage. This could lead US businesses to raise prices of their goods to offset the constant demand, which will prompt inflation and diminish the purchasing power of households. Such a scenario could stem stagflation in the US economy and is unfavorable for the US Dollar.
- Additionally, investors are losing faith in the US Dollar’s label as a safe-haven asset due to ever-changing tariff headlines from President Trump. His sudden decision to declare a 90-day pause on the execution of reciprocal tariffs and signals to exempt duty on automobiles for some time has forced investors to doubt the credibility of the US Dollar.
- Meanwhile, the recovery in the US bond yields due to escalated fears of a US economic slowdown has also failed to lighten the strength in the Gold price. 10-year US Treasury yields have rebounded to near 4.34% after correcting almost 6.6% in the last two trading days from their recent high of 4.60%.
- Historically, higher yields on interest-bearing assets diminish the appeal of non-yielding assets, such as Gold. However, Treasury yields have not created any havoc for Gold bulls despite rising 11% in over a week, as traders have raised their bets supporting the Federal Reserve (Fed) to cut interest rates by 100 basis points (bps) this year. Traders have increased Fed dovish bets amid firming US economic slowdown risks.
- For fresh cues on the interest rate outlook, investors await Fed Chair Jerome Powell’s speech at the Economic Club of Chicago at 17:30 GMT.
Technical Analysis: Gold breaks above $3,300
Gold price tests the region above $3,300 and posts a fresh all-time high around $3,318 on Wednesday. The outlook of the Gold price is upbeat as the 20-day Exponential Moving Average (EMA) slopes higher, trading around $3,112.
The 14-day Relative Strength Index (RSI) trades above 70.00, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as a key support zone for the pair. On the upside, the round level of $3,400 will act as a key resistance zone.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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