- Gold’s bullish momentum increased after Trump implemented tariffs on China.
- The World Gold Council forecasted strong demand for gold this year.
- US job vacancies dropped more than expected.
Gold prices extended gains on Wednesday as investors scrambled for safety in the yellow metal amid fears of a trade war between the US and China. Meanwhile, data in the previous session revealed some weakness in the US labor market, putting pressure on the Fed to cut rates. However, market participants are more focused on the looming nonfarm payrolls report for more clues on future Fed moves.
Spot gold (Source: Bloomberg)
Gold has maintained a strong rally in recent weeks due to the uncertainty surrounding Trump’s policy changes. However, bullish momentum increased this week after Trump implemented tariffs on China. Moreover, he was ready to impose a 25% tariff on Canada and Mexico but paused at the last minute after negotiations.
China’s 10% duty started on Tuesday. Gold rallied because China immediately responded with a tariff on some US goods. The development increased the likelihood of a trade war between the two nations with negative impacts on their economies.
Meanwhile, the World Gold Council reported solid demand for gold in 2024 due to central bank purchases. Furthermore, they forecasted strong demand this year due to economic uncertainty. Since Trump took office, economists have been predicting robust growth in the US. However, the outlook for other major economies has dimmed.
Notably, China is a major gold consumer. Therefore, tariffs on Chinese goods could weaken the economy, hurting demand. Nevertheless, since China is ready to respond to any tariffs, there is uncertainty over the long-term impact that is driving investors to buy the safe gold.
Elsewhere, US data on Tuesday revealed that job vacancies dropped more than expected. Openings fell to 7.60 million, missing forecasts of 8.01 million and signaling softness in the US labor sector. A weak labor market will put pressure on Fed policymakers to cut interest rates. However, since Trump’s tariffs might increase inflation, the Fed will need more convincing to lower borrowing costs.
The nonfarm payroll report, due on Friday, carries more weight than any other employment report. Therefore, if it shows weaker-than-expected job growth, rate-cut expectations will increase.
On the other hand, if the sector remains robust, the US Central Bank will have more room to keep interest rates unchanged. Gold can rally during seasons of high inflation as it is a store for wealth. However, high interest rates hurt the non-yielding metal.