Gold prices have sharply retreated from their record highs set last week, as global stock markets experienced a relief rally spurred by signs of easing tensions in the ongoing trade war, particularly between the United States and China.
Both spot gold and gold futures have dropped approximately 6.5% from their all-time highs reached on Tuesday. This decline follows investor profit-taking as demand for gold as a safe-haven asset has waned. According to strategists at Barclays Plc, the recent surge in gold prices has outpaced market fundamentals and may be technically overstretched. Bloomberg further reported that hedge funds have reduced their net long positions in gold futures and options to a level not seen in over a year.
Michael Brown, senior research strategist at Pepperstone, noted that the weakening of investor interest, particularly in Asia, could suggest more downside for gold. He added, “This could be exacerbated by weaker longs exiting a trade that has become overly crowded.”
Euro’s Strength Contributes to Gold’s Surge in 2025
Gold’s recent rally has been driven in part by economic uncertainties, particularly those stemming from U.S. President Donald Trump’s trade tariffs. As a traditional hedge against financial crises and inflation, gold has outperformed global markets, rising more than 25% so far this year. A key factor contributing to the precious metal’s surge has been the strengthening of the euro, which has put significant pressure on the U.S. dollar.
The trend of “U.S. exceptionalism” has sent the dollar lower, while the euro has gained strength, with the EUR/USD pair increasing by 11% since February. The World Gold Council noted that the euro’s strength and U.S. dollar weakness were crucial drivers of gold’s performance, alongside rising geopolitical risks related to tariff concerns. This euro rally has also made gold more affordable for European investors, who contributed significantly to the surge in gold demand, with gold ETF purchases in Europe reaching $1 billion (€0.88 billion) in March, making it the second-largest buyer regionally.
Near-Term Downside Risks for Gold
Despite its impressive gains, gold faces several near-term risks that could put downward pressure on its price. These include a fading risk-off sentiment, technical overbought signals, potential liquidity issues, and a slowdown in central bank purchases.
The primary driver behind gold’s recent retreat has been improved risk sentiment following Trump’s announcement that he would substantially reduce tariffs on China. This development has sparked a broad rally in global stock markets. Last week, major stock exchanges largely recovered from April losses amid signs of de-escalation in the U.S.-China trade dispute. The shift in Trump’s stance is expected to prompt fund managers and retail investors to re-position their portfolios.
Additionally, gold’s rapid price increase has resulted in an overbought market from a technical perspective, leading traders to take profits and establish short positions. The options market, in particular, reflects these trends.
Central banks and individual investors may also reduce their gold purchases in response to the sharp price rise. Economic uncertainties could make gold investing less affordable for retail investors, further impacting demand.
Finally, gold rallies are often supported by loose monetary policies and high liquidity. However, inflationary risks linked to Trump’s tariffs may prompt central banks to slow their interest rate cuts, and efforts by the Trump administration to tighten government spending could create a liquidity crunch.
Outlook for Gold
Despite these challenges, Brown remains optimistic about gold’s prospects, citing ongoing global uncertainties. “Given all the uncertainty and tumult elsewhere, gold still looks like a better bet as a haven than pretty much anything else,” he said, indicating that gold may continue to be an attractive investment amid the turbulence in global markets.
Related topics:
- India Surpasses China in Gold Purchases, Buying 51% More in Three Months
- Qilu Bank Enhances Support for Small Businesses with Innovative Financial Tools
- Bitcoin Poised for a Surge Amid Gold’s Delivery Delays, Expert Claims
