Gold rebounded from 1-month lows and continued upwards as safe-haven demand increased due to rising uncertainty on US fiscal outlook, geopolitical tensions and dovish central bank policies.
Moody’s Downgrade
Moody’s downgrade was the main catalyst in the gold rally, which rated the US credit rating to Aa1, downgraded from Aaa, which indicated fiscal weaknesses and concerns on sustainability.
Traders and investors also reacted to the House Rules Committee’s approval of a tax-and-spending bill which could add between $3 trillion and $5 trillion to the federal deficit. ⁽¹⁾
The US Treasury Department saw soft demand for a $16 billion sale of 20-year bonds on Wednesday, which is weighing not only on the US dollar but on US stocks as well, with traders already concerned after Moody’s cut the US triple-A credit rating last week. This factor triggered safe-haven demand for gold which caused the metal to rally on USD weakness. ⁽²⁾
Ongoing Rate Cuts From Global Central Banks
Central banks are continuing their rate cut cycle as global trade tensions continue to weigh on the global economies. Rate cuts usually cause gold to rise as it tends during rate cut cycles.
The Reserve Bank of Australia (RBA) has cut interest rates by 25 bps to 3.85%, which was due from the disinflation process in Australia and the tariff standoff between the US and China. The trade tension could impact Australia’s economy due to its trade partnership with China, which could lead to slowdowns in the Chinese economy, hence impacting market sentiment and reduce demand for Australian goods if tensions rise. ⁽³⁾
The RBA also signaled more rate cuts in the future if global trade tensions rise further.
The People’s Bank of China (PBoC) has also cut its key lending rates by 10 basis points , as a stronger yuan and easing trade tensions offer it room for monetary easing aimed at boosting its economy. China has also been accumulating gold, relying less on the US Dollar in order to support its monetary policy. ⁽⁴⁾
Total gold imports reached 127.5 metric tonnes, a 73% jump from a month earlier, after the People’s Bank of China allocated fresh quotas to some commercial banks in April. Gold prices are up by more than 20% this year, after peaking at a record $3,500/oz in April. Key drivers of the rally are geopolitical risks and central bank buying. ⁽⁵⁾
Fed Still on Wait and See Stance
Several Fed policymakers indicated in speeches and interviews indicated recently that the Federal Reserve is unlikely to lower its key fed funds rate at its two meetings this summer.
Atlanta Fed president Bostic stated that the Fed needs to wait at least after summer to consider cutting rates. New York Fed president Williams also stated that a rate cut won’t happen during the summer, instead the Fed will assess the economic data and developments from president Trump’s policies as they need to determine their next moves. ⁽⁶⁾
Traders have priced in a 94% chance of a rate hold in June and a 71% chance rate hold from the Fed in July, with only 2 rate cuts priced in 2025. ⁽⁷⁾
The rate holds could be bad for gold, but the latest US inflation and retail sales figures showed signs of economic cooling, reinforcing the market’s dovish outlook, which could support gold in the long-run as the US Dollar is weakening on soft data.
Geopolitical Tensions
Ongoing geopolitical tensions in Eastern Europe and the Middle East continue to fuel demand for precious metals. With investors safe haven from fiscal uncertainty, policy risks, and elevated global conflict.
China’s Ministry of Commerce sharply criticized U.S. restrictions on AI chip exports, accusing the US of economic coercion. This escalation might be seen as a threat to already fragile global supply chains. ⁽⁸⁾
