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Gold flat ahead of US PCE with US tariffs set to stir up trade war

  • Gold falls flat after reaching a fresh all-time at $2,800.93 on Friday in early trading.
  • On Saterday, the Trump administration will impose 25% tariffs on Canada and Mexico, stirring up potential trade war.  
  • Gold’s new all-time high could be tested again, should US PCE data turn out weaker than expected.

Gold’s price (XAU/USD) is flat and just a sigh away from its fresh all-time high, for now on record at $2,800.93, with some profit taking underway. On the geopolitical front, markets got rattled by comments from US President Donald Trump who confirmed 25% tariffs to be imposed on Canada and Mexico, the two largest US trading partners, starting on Saturday, and threatened to impose 100% tariffs on BRICS nations if they try to replace the US Dollar with a new currency in international trade. This should act as a headwind for Bullion since it could lead to a trade war and inflation fears with price surges for consumers and manufacturers in the US. 

On the economic data front, inflation will be drawing all the attention, with the US Personal Consumption Expenditures (PCE) Price Index releases for December, the Federal Reserve’s preferred inflation gauge, due later on the day. Overall,  figures are expected to remain stable or marginally higher. 

Daily digest market movers: PCE to make for interesting Friday 

  • US President Donald Trump is poised to unleash his first wave of tariffs on Saturday, sending foreign governments and businesses rushing to skirt potential duties and prepare for retaliation. Trump has pledged 25% tariffs on about $900 billion in goods from both Canada and Mexico, Bloomberg reports. 
  • On Thursday, bullion already printed a fresh all-time high after the preliminary 2024 fourth-quarter reading of the US Gross Domestic Product (GDP) came in softer than expected, pointing to lesser growth in the US, Reuters reports. 
  • President Trump reiterated on Thursday his threat of imposing 100% tariffs on BRICS nations if they try to replace the US Dollar (USD) with a new currency in international trade. Trump posted on TruthSocial: “We are going to require a commitment from these seemingly hostile countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariff,” and continued “there is no chance that BRICS will replace the US Dollar in international trade, or anywhere else, and any country that tries should say hello to tariffs, and goodbye to America!”
  • At 13:30 GMT, the US Personal Consumption Expenditures (PCE) Price Index data for December will be released. Expectations are for the monthly core PCE reading to increase by 0.2% from 0.1% in November. The monthly headline PCE data should tick up  0.3% from 0.1% the previous month.
  • Markets might face substantial volatility on Monday due to the possible sanctions being imposed over the weekend by the Trump administration on Canada and Mexico. 

Technical Analysis: Risks for profit taking

After a spike higher on early Friday, hitting a fresh all-time high of $2,800.93, the question will be whether bullion will not face some substantial profit-taking. Tariffs are always considered inflationary, thus a headwind for the precious metal. Should the US data come in higher than expected later in the day, inflation concerns would spark more selling pressure, and Gold might quickly dive lower in search of support. 

The first support is quite far off, at $2,721, a triple top in November, December and January, broken on January 21. Just below that, $2,709 (October 23, 2024, low) is in focus as a second nearby support. In case both abovementioned levels snap, look for a dive back to $2,680 with a full-swing sell-off. 

Analysts and strategists have called for $3,000, but $2,800 looks like a good starting point for the next upside resistance. Based on the price action from Thursday, technical analysis (pivots) shows $2,809 and $2,824 as important daily resistance levels. 

XAU/USD: Daily Chart

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.