Gold prices suffered a sharp decline on Monday, May 12, plunging more than 3% as markets responded to a breakthrough in U.S.-China trade negotiations. The announcement of a 90-day tariff suspension and significant reciprocal tariff reductions spurred a surge in risk appetite, sending investors flocking to equities and risk-driven assets at the expense of traditional safe havens like gold.
By the close of Monday’s session, spot gold was trading at $3,225 per ounce, down more than $100 from previous levels. The sell-off was amplified by a robust rally in the U.S. Dollar Index (DXY), which jumped 1.25% to 101.74, further pressuring gold prices.
Trade Truce Boosts Dollar and Yields, Weighs on Gold
Over the weekend, Washington and Beijing reached a pivotal agreement to lower tariffs on each other’s goods, with the U.S. reducing its tariffs from 145% to 30% and China cutting its tariffs from 125% to 10%. Both sides also committed to suspending certain duties for 90 days, fueling hopes of a broader de-escalation in trade tensions.
The development injected optimism into global markets, leading to a rise in U.S. Treasury yields as investors scaled back expectations of aggressive Federal Reserve interest rate cuts. Markets are now pricing in only two Fed rate cuts in 2025, down from earlier expectations of three cuts. This shift in monetary policy expectations lifted yields on U.S. Treasury bonds, adding another layer of downward pressure on non-yielding assets like gold.
Inflation Data and Central Bank Buying in Focus
Attention now turns to the upcoming U.S. Consumer Price Index (CPI) report, due later this week. Economists anticipate headline CPI growth to hold steady at 2.4% year-on-year in April, while core CPI is expected to remain at 2.8%. Any upside surprises could reinforce the Fed’s cautious stance on rate cuts, further strengthening the dollar and undermining gold.
In parallel, data from the World Gold Council revealed continued central bank interest in gold. The People’s Bank of China (PBoC) added 2 tonnes of gold to its reserves in April, marking the sixth consecutive month of accumulation. The National Bank of Poland increased its gold reserves by 12 tonnes to 509 tonnes, while the Czech National Bank added 2.5 tonnes in the same period. Despite these steady purchases, broader market dynamics are currently overshadowing central bank buying as a price driver.
Technical Outlook: Gold at Critical Support Levels
Analysts warn that the fading risk aversion has interrupted gold’s recent uptrend and may expose the precious metal to further downside in the short term. Technical charts indicate that gold is now approaching critical support at the May 1 low of $3,202. A decisive break below this level could trigger a deeper correction toward the 50-day Simple Moving Average (SMA) at $3,137, with the $3,100 mark as the next psychological support.
On the upside, if gold manages to reclaim the $3,300 level, bulls will face immediate resistance at $3,350. A breakout above that level would open the path to challenge $3,400, with further gains possible if geopolitical tensions re-escalate.
Analysts Caution on Long-Term Risks, Upside Potential Remains
In an interview with Kitco News, Nitesh Shah, Head of European Commodities and Macroeconomic Research at WisdomTree, emphasized that beyond trade developments, the independence of the Federal Reserve could emerge as a key risk factor for the U.S. economy. Shah warned that if political interference erodes confidence in the Fed’s decision-making, demand for hard assets like gold could surge.
Despite the recent pullback, Shah remains bullish on gold’s long-term trajectory. He projects that gold prices could reach $3,610 in the first quarter of 2026 under his baseline scenario. However, with heightened geopolitical and monetary policy uncertainties, he sees the potential for prices to test $4,000 per ounce, particularly if global financial market instability persists.
Conclusion
While gold’s sharp $100 drop has rattled markets, analysts suggest this could be a temporary setback within a broader bullish narrative. With inflation data, Federal Reserve policy, and geopolitical risks still in flux, gold’s safe-haven appeal remains intact for the longer term. However, near-term price action is likely to be dictated by macroeconomic data releases and investor sentiment toward U.S.-China trade relations.
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