The price of gold (XAU/USD) rose to a new record high near $4,675 during the early Asian session on Monday. The precious metal is gaining momentum after US President Donald Trump said he would impose tariffs on eight European countries that opposed his plan to seize Greenland.
Trump announced a 10% tariff on goods from countries including Denmark, Sweden, France, Germany, the Netherlands and Finland, along with the UK and Norway, starting February 1, until the US is allowed to buy Greenland. The move raised fears of retaliation from Europe, which supported traditional safe-haven assets such as gold.
European Union ambassadors reached a broad agreement on Sunday to step up efforts to dissuade Trump from imposing tariffs on European allies, while also preparing retaliatory measures if the tariffs go ahead.
On the other hand, a series of US economic data, including improving US labor market data, lowered the implied odds of imminent interest rate cuts by the US Federal Reserve. Fed funds futures have pushed expectations for the next rate cut into June and September from January and April.
The view that the US central bank can keep interest rates high for longer generally supports the US dollar and weighs on non-interest bearing assets such as gold.
Frequently asked questions about gold
Gold has played a major role in human history as it has been widely used as a store of value and a medium of exchange. Currently, apart from its luster and use in jewellery, the precious metal is widely viewed as a safe haven asset, meaning it is a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency depreciation because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve assets and safe havens. When the value of the dollar declines, 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 rise in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession could cause the price of gold to rise rapidly due to its safe-haven status. As a lower-yielding asset, gold tends to rise as interest rates fall, while a higher cost of money usually negatively impacts the yellow metal. However, most of the moves depend on how the US Dollar (USD) behaves as the asset is priced in Dollars (XAU/USD). A stronger dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.
