Samer Hasn
Gold is sharply declining for the second consecutive day, falling by over 1% and heading toward its lowest levels in more than a month—reaching $3,135 per ounce in spot trading.
The losses in gold come amid a prevailing climate of de-escalation on both trade and geopolitical fronts—two of the key drivers that had previously fueled the yellow metal’s gains. At the same time, concerns about rising inflation and prolonged monetary tightening are resurfacing.
The start of trade negotiations with China and the broadly positive sentiment surrounding Donald Trump’s visit to the Gulf region appear to be shaping a narrative of de-escalation. The launch of trade talks over the past weekend triggered a bearish opening for gold, which is now on track for its worst weekly performance this year. De-escalation and a gradual reduction of tariffs are easing fears of a looming U.S. recession or a deepening economic slowdown in China.
However, tariffs are not being removed entirely, and they could ultimately create conditions that are unfavorable for gold: rising inflation and extended monetary tightening by the Federal Reserve. The unexpected slowdown in April’s core Consumer Price Index (CPI) was not enough to ease future inflation concerns. According to the Wall Street Journal, the data did little to encourage the Fed to shift away from its current “wait-and-see” stance.
As a result, markets no longer expect a rate cut before September—having previously eyed June or July as possible windows for monetary easing, according to CME’s FedWatch Tool’s numbers.
These inflation concerns and expectations for prolonged high interest rates have pushed both short- and long-term U.S. Treasury yields to their highest levels in over a month, adding further pressure on gold. The yield on 10-year Treasury notes rose to 4.458%, the highest since April 11. Meanwhile, the ICE BofAML U.S. Bond Market Option Volatility Estimate Index—an indicator of fear in the Treasury market—hovered near its lowest level since March. Rising yields, coupled with reduced volatility in the bond market, make U.S. bonds more attractive and exert downward pressure on gold.
On the geopolitical side, Trump’s visit to the Middle East and the announcement of deals worth hundreds of billions of dollars—as well as repeated statements by him and Gulf leaders promoting peace—have helped reduce the risk premium that has supported gold prices for over a year and a half. Growing economic integration between the two economic blocs may incentivize the U.S. to remain committed to de-escalation in the region and to reject calls for renewed conflict—a stance already evident in developments surrounding U.S.-Iran-Israel relations.
Hasn is Senior Market Analyst at XS.com
