Gold Hits New Peak as Investors Hedge

Gold (XAU) prices reached a new record high in early Tuesday trading, 11 February, as safe-haven demand for the yellow metal increased following new tariffs on steel and aluminium imports to the US. The move was supported by rising geopolitical tensions between Hamas and Israel after the former announced it would stop the release of hostages.

Investors patiently await Federal Reserve Chair Jerome Powell to testify before Congress on Tuesday and Wednesday to gauge the implications of the new White House policies on inflation and growth while expecting both CPI and PPI data on Wednesday and Thursday this week, respectively.

Markets React to Geopolitical Tensions

Spot gold rose as high as $2935 per troy ounce on Tuesday as US President Donald Trump imposed a new 25% tariff on all steel and aluminium imports to the US, set to commence on 12 March. Trump said these tariffs would bear no exceptions or exemptions and could eventually go higher as other countries retaliate, while he threatened to take new measures against countries that have already imposed levies on US goods. Canada and Mexico, which saw the previous 25% levies postponed, supply around 40% of US steel. In 2018, both countries received exemptions. 

Following the tariff announcement on Monday, 10 February, Cleveland-Cliffs (CLF) climbed 18%, Nucor (NUE) rose 5.6% and Steel Dynamics (STLD) edged 4.9% higher. Aluminium (ALI) producers Century Aluminium and Alcoa (AA) also ended higher, recording a 10.2% and 2.2% rise, respectively.  (Source: Barron's)

On the other hand, China was the one country that retaliated, with tariffs on $14 billion worth of US goods. The country also announced a potential $27 billion investment in gold via a new insurance pilot programme at a time when its latest gold reserve data reported last Friday showed the country continued to purchase gold for a third month in January despite gold trading at record highs. Central bank demand from Poland and Turkey accounted for around 70% of the total 2024 demand, with the early February tariff delay offering little to no effect on inflation fears.

On the geopolitical front, Hamas decided on Monday to delay the release of Israeli hostages, citing ceasefire violations and risking the cancellation of the agreement signed just three weeks ago. The announcement by Hamas comes in the wake of Donald Trump's calls to empty war-torn Gaza and relocate Palestinians to Egypt and Jordan. The US President threatened the two countries with withholding aid for non-compliance and provided Hamas with a 15 February deadline before he cancels the ceasefire agreement.

Gold Outlook Hinges on Fed

The precious metal has risen around 11% this year alone, following a series of record highs as market participants expect Trump’s policies to reignite inflation. Multiple-term breakeven inflation rates, including the 2-, 5- and 10-year, have been moving higher since the start of the year, pointing to stronger demand for gold as an inflation hedge. Bank of America (BAC) analysts expect the impact of inflation to transpire into readings in the second half of 2025, with additional tariff impositions accelerating this pace. Markets will likely focus on this week’s CPI and PPI reports and clues from the Fed Chair’s testimony.

Core inflation is expected to fall to 3.1% from 3.2% year-on-year but rise on the faster end to 0.3% from 0.2%, while the headline is expected to drop to 0.3% from 0.4% month-on-month and stabilise at 2.9% annually. The Fed Chair said the bank is in no hurry to cut interest rates and paused to see whether further progress on inflation was warranted, though unemployment and labour market conditions remain firm.

The consensus from banks sees gold prices higher in 2025, with Goldman Sachs (GS) and JPMorgan (JPM) eyeing the $3,000 per ounce mark due to central bank demand and soaring US Federal debt amounting to $36.383 trillion. Despite the chances of the Fed continuing to cut rates being less clear, the central bank is still expected to cut twice in 2025, offering another bullish catalyst compared to US Treasury bonds. Deutsche Bank (DBK.DE) still pointed to a higher bound of $3,050.

Meanwhile, Gold appears technically overbought, though the long-term trend remains intact. Further hawkish guidance may put short-term pressure on its prices, assuming geopolitical risks subside. 

Conclusion

Gold’s rise to record highs was a result of Trump’s newest tariff move on steel and aluminium, stemming from inflationary concerns and prompting investors to seek refuge in the safe haven. Coupled with geopolitical uncertainty in Gaza, market participants have a complex yet cautiously optimistic outlook for 2025.

With short-term signals from the Fed Chair and US data coming soon, short-term indicators suggest caution. Yet, the long-term trend remains intact, with expectations of continued safe-haven demand driven by central banks and fiscal uncertainties.