Spot gold prices hit an all-time high this week, after rallying on the back of the Federal Open Market Committee's interest rate decision on Wednesday.
The XAU/USD pair tested the psychological $2800 level but was unable to stay above this level until the end of the week, likely driven by profit-taking ahead of the weekend.
Gold's monthly streak also ended on Friday, which was a very bullish sign after two months of decline, keeping the possibility of a new all-time high alive as we move into February. Gold prices have been trending higher throughout the month, even gaining over 9% in January. However, Friday was the final push toward a new all-time high for the yellow metal. What's notable here is that while yields dipped slightly, they didn't see a dramatic move. This suggests that something else is driving gold higher.
Gold's rebound is driven by the main talking point in the markets this week: the possibility of tariffs actually being implemented over the weekend. When he took office 11 days ago, US President Donald Trump said he would impose 25% tariffs on Mexico and Canada starting February 1. Late Thursday, he reiterated that commitment, which prompted a rally in gold.
The market consensus is that tariffs will generate inflationary pressures, as the cost of the duties is expected to be passed on to consumers. On the other hand, higher inflation is likely to keep yields elevated, as the Federal Reserve is expected to keep interest rates high to prevent further inflation. However, the market already anticipates higher interest rates, and the impact is seen as relatively small compared to the impact of higher inflation.
Gold's appeal lies in its ability to serve as a store of value to offset inflation. Investors will hold gold if they believe the dollar will lose value. This may tempt them to abandon gold and buy bonds if it means an attractive return above the rate of inflation. Therefore, the expectation of higher inflation has a similar effect to lower interest rates. So, even if yields remain constant, gold may gain if markets price in lower real yields as a result of higher consumer prices.
Until recently, the notion was that Trump was using tariffs as a negotiating tactic, and that may be entirely true. If Canada and Mexico aren't willing to make the concessions he's demanding to avoid tariffs, then tariffs must be imposed. Otherwise, they will lose their negotiating power. Trump has implied that the problem with Canada and Mexico is the shipment of fentanyl across the border, and it's unclear what would satisfy the White House in terms of addressing that issue.
Even in the hours before the deadline, there were reports of officials working to avoid implementing the tariffs. One key issue is whether the tariffs will apply to Canadian oil, which supplies the United States with about 8% of the crude oil it uses on average. A 25% tariff on Canadian crude oil imports would put about 2% price pressure on US fuel, which would likely be politically costly for a president who campaigned on lowering fuel costs.
Markets are likely to focus on the inflationary implications of tariffs, particularly regarding gold. If tariffs are applied to materials that represent a small portion of the cost of finished products (such as aluminum and steel), the inflationary impact may be minimal. This could hurt gold's chances of making gains. However, rising energy costs can have an indirect impact through supply chains, keeping inflation persistently high (such as the problem facing Europe). This could keep gold prices elevated for some time.
The uptrend has been on a rapid pace recently, and this week saw a test of support at 2750, which was a confluence of an uptrend line before bulls were able to push to that new high. This is where buyers now need to defend to maintain control of the short-term trend. If sellers can push below last week's low at 2730, a deeper correction scenario will start to look more attractive. Ideally, for bulls, support will remain above 2750, and two prices in particular remain interesting for this: the previous high at 2786 and then a set of previous resistance at 2766.
