Gold (XAU/USD) rose to another record high on Wednesday as risk sentiment deteriorated in global markets, pushing investors towards safe-haven assets amid growing geopolitical and economic uncertainty. At the time of writing, the XAU/USD pair is consolidating around $4,855, after hitting a new all-time high near $4,888 earlier in the European session.
The metal’s bull run shows little sign of slowing, with prices up more than 6% so far this week after US President Donald Trump reignited trade tensions with the European Union over control of Greenland.
The renewed rhetoric has raised fears of a broader trade war, with speculation growing that Europe may weaponize its massive holdings of US stocks and Treasuries, fueling “sell America” sentiment.
The risk-off tone was reinforced by turmoil in Japan’s sovereign bond market, where a sharp sell-off pushed long-term yields to multi-decade highs and rattled global debt markets, including US Treasuries.
Continued volatility in bond markets is raising concerns about the financial health of major economies, boosting demand for gold as a hedge against macro and financial instability.
Market Drivers: Trade war fears dominate markets as tensions escalate between the United States and the European Union
- Speaking at the World Economic Forum in Davos, US President Donald Trump reiterated his position on Greenland, saying the region is essential to strategic national security. Trump added that Greenland would not pose a threat to NATO, but would instead strengthen the alliance. He also dismissed concerns about military action, saying he would not use force to seize Greenland.
- Tensions between the United States and the European Union remain at the forefront after President Donald Trump threatened to impose new tariffs on eight European countries, saying a 10% tax will be imposed from February 1 and will rise to 25% in June unless “an agreement is reached to buy all of Greenland.”
- European leaders have responded to tariff threats, reiterating that the bloc is ready to deploy countermeasures if necessary. Attention has also turned to Europe’s large holdings of US assets, estimated at around $10 trillion, which some analysts say could be used as economic leverage if tensions escalate.
- On Tuesday, Danish pension fund AkademikerPension said it would sell its holding of US Treasuries, worth about $100 million, by the end of the month, due to “weak US government finances.”
- The US Dollar Index (DXY), which measures the value of the US currency against a basket of six major currencies, is trading flat around 98.50 after falling to two-week lows on Tuesday.
- Focus is also on the US Supreme Court, which is set to hear arguments in a case tied to President Trump’s efforts to fire Federal Reserve Governor Lisa Cook over mortgage fraud allegations.
- The US data docket is weak on Wednesday, leaving markets sensitive to geopolitical headlines, with the Pending Home Sales report the only major release. Traders await delayed Personal Consumption Expenditure (PCE) inflation data and third-quarter annual GDP figures due on Thursday.
Technical Analysis: XAU/USD remains bid despite extended momentum signals
From a technical perspective, the XAU/USD pair continues to navigate uncharted territory, with the bulls refusing to step aside despite increasingly overbought conditions across multiple time frames.
On the 4-hour chart, the 20-period simple moving average within the Bollinger band is sloping upward, reinforcing the bullish structure. Price action remains compressed against the upper Bollinger band as the bands continue to widen, indicating extended bullish conditions and increased volatility.
A sustained move above the upper band near $4,868.15 would expose levels above $4,900, with $5,000 emerging.
On the downside, the middle band around $4,699.64 represents the first layer of support, followed by the lower Bollinger Band near $4,531.13. As long as prices remain above that area, the broader bullish bias will remain in place.
The Relative Strength Index (RSI) is approaching 83, which is deep into overbought territory and indicates a risk of a halt or pullback in the near term. However, the strength of the trend remains steady, with the Average Directional Index (ADX) rising towards 42, indicating that buyers remain in control despite the extended conditions.
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.
