Gold prices reached a new high, while equity markets and crude oil continued to decline on Thursday amid an escalating global trade war. Risk-off sentiment prevailed in the financial markets due to economic and political uncertainties, shifting funds away from riskier assets.
Gold prices reached a new high on Thursday, with gold futures at Comex surging 1.5%, briefly surpassing a new milestone of $3,000 (€2,764) per ounce for the first time in history. Spot gold prices jumped 1.9% to $2,988 (€2,752) per ounce, making another all-time high.
Gold is seen as a typical haven asset, with its prices rising more than 13% this year amid risk-aversion sentiment, a weakened US dollar, and increasing central bank purchases.
Haven demand surges
Demand for safe-haven assets surged amid economic and political uncertainties surrounding Trump’s tariffs and rising geopolitical tensions. The global economic outlook has darkened due to escalating tit-for-tat tariff threats between the US and other countries.
US President Donald Trump imposed blanket 25% tariffs on steel and aluminium imports, triggering retaliatory measures from Canada and the EU. He also threatened to impose a 200% tariff on EU wine and other alcoholic beverages in response to the bloc’s plan to tax American whiskey imports. While the widening trade war is expected to fuel inflation, higher trade barriers and deglobalisation could slow global economic growth.
A deepening trade conflict may further exacerbate inflationary pressures while weakening economic growth, creating the conditions for stagflation—a scenario historically favourable for gold as a store of value.
US dollar weakens
Additionally, a weakened US dollar and expectations for a sooner Federal Reserve rate cut also fuelled gold’s rally. The US Dollar Index (DXY), which measures the value of the US dollar relative to a basket of major foreign currencies, has declined more than 5% from its yearly high in mid-January.
Concerns about the US economy are likely to lead to lower interest rates, and recent cooler-than-expected inflation data has reinforced market expectations for a rate cut in June, rather than the previously projected September. The dollar may continue to weaken against other G10 currencies as investor sentiment shifts. However, this trend may not persist if the Federal Reserve maintains a hawkish stance, as escalating trade tensions could exacerbate inflationary pressures.
Meanwhile, the euro’s rally has also weighed on the US dollar, amid optimism surrounding a potential fiscal policy shift within the European Union, prompting investment flows away from US markets.
Central banks may shift away from US Treasuries
Central banks have been increasing their gold reserves while reducing holdings of US government bonds. Trump’s tariffs and fiscal policies aimed at reducing the government deficit have raised concerns about the US’s ability to service its debt.
“Trump’s trade and tax policies are driving flows into gold as central banks look to shift reserves away from Treasuries, while there are fears about the rising US debt load and the US economy’s ability to service it,” Kyle Rodda, a senior market analyst at Compital.com, wrote in an email.
Investors move into defensive mode as risk assets slump
Investment funds have rotated away from riskier assets such as equities and energy towards defensive assets, including gold, amid mounting concerns about global economic growth.
Risk-sensitive assets, including stock markets and crude oil, continued to decline. Investors have also been withdrawing from US equity markets, particularly large-cap technology stocks, over the past month due to growth concerns. The S&P 500, the benchmark US stock index, has entered correction territory for the year, falling 10% from its all-time high in February. European stock markets are also expected to end the week lower due to spillover effects from Wall Street.
Crude oil prices remain near multi-year lows due to a deteriorating demand outlook, while ceasefire talks could see Russian production return to the market. Benchmark crude futures, including West Texas Intermediate (WTI) and Brent, have fallen 7% and 8% respectively this year, nearing their lowest levels since December 2021.
