Head of Commodity Strategy
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Key points:
Gold’s correction from last month’s record high at USD 3,500 continues to unfold, gathering pace as global risk sentiment shows tentative signs of improvement. The initial catalyst was renewed optimism surrounding potential progress in U.S. trade negotiations—particularly with China and the EU—which, combined with a tech-led rebound in U.S. equities and a firmer dollar, prompted profit-taking after a year-long rally that has lifted the yellow metal by 22% year-to-date and nearly 40% over the past twelve months. In our most recent market update, we flagged the increasing risk that the sharp reversal from the blow-off top—exacerbated by former President Trump’s subsequently retracted threat to dismiss the Federal Reserve chair—could pave the way for a deeper correction. With risk sentiment stabilizing and equity markets finding a bid, gold has struggled to maintain upside traction and is now seeking support at key technical levels. The broader uptrend in gold has been driven by a confluence of macroeconomic and geopolitical forces. Chief among them: a weakening U.S. dollar, persistent central bank de-dollarisation, and mounting concerns over the ballooning U.S. fiscal deficit. Meanwhile, the U.S.–China trade conflict, far from resolved, continues to cast a long shadow over global growth, reinforcing the role of gold as a strategic hedge against economic dislocation and policy missteps. While the short-term correction has been driven by improved market sentiment, the structural drivers underpinning gold's strength remain firmly in place. Disappointing economic prints this week from both the U.S. and China underscore the fragile state of the global economy and reignite fears of a tariff-driven growth slump. These dynamics reinforce gold’s role in a diversified portfolio, particularly as inflation remains sticky and bond yields volatile.
One key dynamic we continue to watch is Chinese investor behavior. As previously noted, China has emerged as a dominant source of demand, particularly through local gold-backed ETFs, which have already surpassed their 2024 inflow totals. The surge in premiums over international spot prices highlights persistent domestic appetite—largely retail-driven—amid concerns over the weakening yuan, a fragile property market, and doubts over the long-term stability of the U.S.–China relationship.
Recent data from Morgan Stanley tracking COMEX gold futures trading activity adds further colour. During a recent four week period, gold futures fell 5.9% during U.S. "pit" trading hours (08:20 to 13:30 EST), but gained a striking 14.7% during "non-pit" hours—primarily reflecting Asian and European market activity. The takeaway is clear: the rally to record highs was almost entirely fuelled by demand from Asia, particularly China.
However, with Chinese markets closed for the Labour Day holiday through May 5, this bid has temporarily evaporated, exposing gold to additional downside pressure. The key question now is whether Chinese investors will return next week with the same intensity, or whether price softness during the holiday lull will prompt further long liquidation.
From a technical perspective, applying Fibonacci retracement levels to the USD 544 rally that followed the early April deleveraging event suggests initial support may emerge near USD 3,165—a 61.8% retracement—just below the April 3 local high at USD 3,168. A deeper correction could extend toward the USD 2,950 to 3,000 zone, a psychologically and technically significant area.
Positioning data reinforces the fragility of the current setup. During the week ending April 22—when gold briefly spiked to USD 3,500—managed money traders, including hedge funds and CTAs, were net sellers for a fifth consecutive week, cutting net long exposure to a 13-month low. This was mirrored by a post-Easter reduction in bullion-backed ETF holdings in the West, suggesting that Western institutional demand is cooling, at least temporarily.
With the speculative community reducing exposure and Chinese demand on pause, the short-term path for gold hinges on whether Asian buying returns post-holiday. Should it fail to re-emerge with conviction, further long liquidation cannot be ruled out.
Having already reached our 2025 price target of USD 3,500, we are currently in wait-and-see mode, monitoring the extent and depth of the ongoing correction. However, with several key structural drivers—outlined below—unlikely to dissipate in the near term, we continue to view the risk skewed toward even higher prices over time.
US Fed Funds rate expectations: Market participants closely watch interest rate expectations set by the Federal Reserve, as they heavily influence the attractiveness of gold. Currently, the futures market is pricing in the possibility of a 75–100 basis point rate cut before year-end, suggesting a more accommodative monetary policy. Lower interest rates reduce the opportunity cost of holding gold (which doesn’t pay interest), thereby supporting its price.
Investment demand for “paper” gold through futures and exchange-traded funds (ETFs): The demand for gold-backed financial products depends on technical market factors, such as price momentum, as well as macroeconomic indicators. In addition, a key factor for investors in ETFs is the cost of holding a non-yielding assets like gold, with the prospect for lower funding cost and recession worries boosting demand.
Rising US inflation expectations: Investors often turn to gold as a hedge against inflation. Recently, falling real yields (nominal yields minus inflation expectations) across the US Treasury yield curve have signaled growing concerns about future inflation. As inflation expectations rise, the real return on fixed-income assets decreases, increasing the relative appeal of gold.
Geopolitical risks: Global instability tends to push investors toward safe-haven assets like gold. A recent correlation between defense stocks and gold suggests that as geopolitical tensions rise—such as conflicts, wars, or diplomatic strains—investors seek safety in gold, thereby supporting its price. In addition, the current trade war adds downside risks to growth while lifting the geopolitical temperature, especially between the US and China, the world's two biggest economies.
Central bank demand amid continued focus on reducing dependency on the USD: A growing number of central banks are diversifying their reserves away from the US dollar, often turning to gold as a neutral reserve asset. Notably, China, India, Turkey, and Russia have been leading this trend. In the last three years to 2024, central banks bought more than 1,000 tons in each year, a process that looks set to continue in 2025 and beyond, thereby underpinning the market as supply is being removed from the market.
Strong Asian demand, particularly from Chinese investors, driven by concerns over domestic economic instability, weak real estate and stock markets, and as a hedge against potential Renminbi devaluation amid tariff-related export pressures.
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