Gold has retreated steeply since last week as global stock markets experienced a relief rally amid signs of a de-escalation in the global trade war, particularly between the United States and China.
Both spot gold and gold futures fell roughly 6.5% from their all-time highs reached last Tuesday. Investors may have started taking profits from the precious metal due to diminishing haven demand. According to strategists at Barclays Plc, the gold rally is running ahead of fundamentals and appears technically stretched following the recent surge. Meanwhile, Bloomberg reported that hedge funds have cut their net long futures and options positions on gold to a more than one-year low.
“This could suggest more downside being on the cards for the yellow metal, which may well be exacerbated by some weaker longs bailing out of what has become an incredibly crowded trade,” wrote Michael Brown, a senior research strategist at Pepperstone, noting that buying interest has particularly dried up in Asia.
Euro’s strength a key factor driving gold’s surge in 2025
Demand for safe-haven assets surged amid economic uncertainties stemming from US President Donald Trump’s tariffs. Gold, a traditional asset used to hedge against financial crises and inflation, has outperformed global markets, rising more than 25% so far this year. Indirectly, the euro’s strength, which has significantly pressured the US dollar, has also contributed to the precious metal’s rally.
“US exceptionalism” sentiment has sent the greenback sharply lower in 2025, while the euro has strengthened markedly against the dollar as a haven asset. The EUR/USD pair has surged 11% since the beginning of February. “Euro strength and thus US dollar weakness was once again a key driver of gold’s performance, alongside an increase in geopolitical risk capturing tariff fears,” stated the World Gold Council in a report. The euro rally also made gold less costly for European investors, with gold ETF purchases reaching $1 billion (€0.88 billion) in Europe in March, making it the second largest buyer among regions.
Downside risks faced in the near-term
However, gold could face further downside risks in the near-term based on several factors, including fading risk-off sentiment, overbought signals, liquidity risks, and a slowing pace of purchases by global central banks.
The primary reason for gold’s retreat has been the recovery in risk sentiment after Trump said he would cut tariffs “substantially” on China, triggering a broad rally in global stock markets. Last week, major stock exchanges mostly pared April losses amid signs of a de-escalation in the US-China trade war. The shift in Trump’s stance may lead to portfolio re-positioning among fund managers and retail investors.
Secondly, gold skyrocketed in a very short timeframe, usually resulting in an overbought pattern from a technical perspective. Traders tend to take profits and establish short positions according to such signals, with the options markets particularly reflecting these trends.
Thirdly, central banks and individual investors may slow the pace of purchases due to the sharp price rally. Economic uncertainties will also likely affect retail investors’ affordability for gold investing.
Lastly, gold rallies are often supported by loose monetary policy and high liquidity conditions. However, inflationary risks linked to Trump’s tariffs may prompt central banks to slow the pace of their interest rate cuts. The Trump administration is also endeavouring to tighten government spending, likely causing a liquidity crunch.
Nonetheless, Brown expects gold to continue its rally due to ongoing uncertainties: “Still, given all the uncertainty and tumult elsewhere, gold still looks like a better bet as a haven than pretty much anything else.”
