– Trade tensions ease
Lagos — Gold continued to decline for the third consecutive session, reflecting growing corrective pressure across the commodities market following a strong rally since mid-May. The weakness in gold stems from a combination of unfavorable macroeconomic factors, notably the return of risk appetite, the rebound in the U.S. dollar, and the outlook for the Federal Reserve (Fed) to maintain its current monetary policy stance.
The current state of inflation and the U.S. economy continues to raise concerns about the risk of “stagflation”—a scenario of high inflation coupled with sluggish economic growth. Recent data shows that the cost of living in the U.S. remains elevated, while GDP growth estimates are beginning to stall. The minutes from the May FOMC meeting, just released, clearly reflect the unusual degree of uncertainty faced by policymakers.
The FOMC minutes reveal that nearly all members are concerned that inflation could persist longer than expected, potentially forcing the Fed to maintain elevated interest rates for an extended period. While there was no signal of an imminent rate hike, there was also no commitment to cutting rates. A neutral stance and a wait-and-see approach were emphasized, meaning that the current high rate environment remains a key headwind for assets like gold.
Maintaining interest rates at high levels continues to be a significant drag on gold, which is particularly sensitive to opportunity costs. As real bond yields rise, investors tend to reallocate capital away from safe-haven assets like gold in search of higher returns elsewhere. This helps explain why capital is flowing out of gold, despite ongoing geopolitical risks.
In addition to Fed policy, another key development comes from the U.S. Court of International Trade, which blocked President Trump’s sweeping “Liberation Day” tariffs. The ruling not only reduces the threat of an escalating trade war—which would otherwise drive demand for safe-haven assets—but also boosted both equities and the U.S. dollar. Both developments have put further downward pressure on gold prices.
The positive market reaction in stocks and the dollar following the court decision has accelerated the decline in gold, highlighting the metal’s sensitivity to changes in systemic risk sentiment. When risk appetite returns, gold—as a safe-haven asset—is often sold off to release liquidity or rotate into higher-yielding investments.
In the short term, with trade war fears temporarily defused and the Fed maintaining a cautious wait-and-see stance, gold’s outlook tilts toward continued correction. However, other uncertainties—especially geopolitical ones—should not be underestimated.
The war in Ukraine still lacks a clear diplomatic resolution. Russia has demanded that NATO halt its eastward expansion and refrain from admitting Ukraine. Meanwhile, Ukraine insists on an unconditional ceasefire from Russia, creating a dangerous stalemate that could escalate if left unresolved.
Therefore, investors should closely monitor political and military developments in Eastern Europe, as well as key U.S. economic data in June, to assess the likelihood of a shift in Fed policy. Gold remains highly sensitive to both inflation and systemic risk, meaning that a trend reversal could occur quickly if macro conditions change.
*Linh Tran, Market Analyst at XS.com
