Spot gold prices fluctuated narrowly in early Asian trading on Tuesday (August 12), currently trading around $3,347.25 per ounce. Spot gold prices plummeted 1.6% on Monday, hitting an intraday low of $3,341.25 per ounce, a new low in over a week. US gold futures for December delivery closed down 2.5% at $3,404.70 per ounce. This decline not only erased last Friday's all-time high of $3,534.1 per ounce but also left investors uncertain. The root cause lies in a web of negative factors, including US President Trump's announcement of gold tariff exemptions, the extension of the US-China trade truce, potential progress in Russia-Ukraine peace talks, and market anxiety over upcoming US inflation data. These events have collectively weakened gold's safe-haven appeal, accelerating its price decline. However, amidst the uncertain outlook for Federal Reserve interest rates, the inflation report may prove a turning point for gold's fortunes.
Tariff policy abrupt change: gold tax exemption announcement triggers decline
The plunge in gold prices was initially triggered by a statement from US President Trump. Last Friday, reports that Washington might impose country-specific import tariffs on gold bars, the most traded commodity in the US, sent gold prices soaring to a record high, with investors flocking to buy to hedge against potential trade friction. However, during New York trading on Friday, the White House announced plans to clarify "misinformation" regarding gold bar import tariffs, causing gold prices to reverse these gains. On Monday, Trump clarified on his social media accounts that gold would not be subject to tariffs. While he provided no further details, this statement quickly dispelled market uncertainty, causing gold prices to continue to decline. Kitco Metals senior analyst Jim Wyckoff noted that with this dispelling of uncertainty, market sentiment shifted to the downside, with traders beginning to sell their positions and focusing on other factors potentially positive for gold, such as the prospect of a Federal Reserve interest rate cut.
The impact of this policy shift cannot be underestimated. Initially, the threat of tariffs was seen as a catalyst for gold, potentially exacerbating global trade tensions and driving investors to seek safe havens. However, Trump's announcement of exemptions dealt a heavy blow, not only directly dampening speculative demand for gold but also demonstrating the US government's flexible adjustments in trade policy. This has instantly transformed gold from a "beneficiary of the trade war" to a "victim of peace," making a rapid price rebound unlikely in the short term. Analysts believe that without further tariff turmoil, gold's support will weaken further, and investors should be wary of the risk of a further pullback.
Geopolitical easing: Russia-Ukraine peace talks weaken safe-haven demand
In addition to tariffs, the potential easing of geopolitical tensions has also been a major driver of the gold price's plunge. US President Trump will hold a summit with Russian President Vladimir Putin in Alaska on Friday to discuss ending the war in Ukraine. On Monday, Trump publicly stated that both Kyiv and Moscow would have to make territorial concessions to reach an agreement, even stating that "there will be some land swaps," and that dialogue would be beneficial to Ukraine. While this statement was tough, it hinted at the possibility of a peace agreement, immediately dampening gold's safe-haven demand. After all, the Russia-Ukraine conflict has been a key driver of gold's price increases since its outbreak. If negotiations show progress, global risk appetite will rebound, potentially leading to capital flows from gold to riskier assets like stocks.
However, this process has not been smooth sailing. European leaders and Ukrainian President Volodymyr Zelenskyy have expressed deep concern and plan to meet with Trump before the summit, fearing Washington will propose terms unfavorable to Ukraine. EU High Representative for Foreign Affairs and Security Policy Kallas stressed the need for transatlantic solidarity in support of Ukraine and warned against making concessions to Moscow. She advocated for an unconditional ceasefire and the establishment of a robust monitoring system. Zelenskyy bluntly stated that any concessions to Russia would not persuade it to cease hostilities, and that increased pressure, including continued sanctions, was needed until Ukraine's security was guaranteed. He posted on social media, "Russia refuses to stop the killing and therefore should not receive any rewards or benefits." Zelenskyy has also actively communicated with leaders of countries like India and Saudi Arabia in an attempt to mobilize further support, while Putin has contacted China, India, Brazil, and other countries to discuss his engagement.
These diplomatic developments highlight the complexity of the Russia-Ukraine issue. Despite Trump's threats to impose tariffs on Russian oil buyers and his agreement to allow more US arms to enter Ukraine, Europe is concerned he might agree to a deal that forces Kyiv to make concessions. If the summit is merely "exploratory talks," as Trump claimed, progress might be discernible within the first two minutes. However, any signs of peace would further diminish gold's appeal. Conversely, if the talks break down, gold could see a rebound, but current market sentiment is cautious, and safe-haven demand has clearly subsided.
US-China trade truce extended: Global tensions ease
Recent developments in Sino-US trade relations have also added downward pressure on gold prices. US President Trump signed an executive order extending the tariff truce with China for another 90 days. This decision took effect on Tuesday, hours before it was originally scheduled to expire, preventing a surge in tariffs to triple digits. Currently, Chinese imports face a 30% US tariff, while China's tariffs on US goods have been reduced to 10%. Trump praised China for "behaving very well" and mentioned that his relationship with the Chinese president is very good. Although he urged Beijing to quadruple its purchases of US soybeans last Sunday, he did not repeat this request on Monday. US Treasury Secretary Benson said that the two sides have the basis for reaching an agreement and expressed optimism about future negotiations.
This extension directly prevented a sharp escalation in US-China tariffs, effectively averting a catastrophic trade embargo. Originally, after the 90-day negotiation period agreed upon in Geneva in May, no extension had been announced for the meeting in Stockholm at the end of July. However, Trump's executive order provided some relief to the market. Washington is still pressuring Beijing to halt purchases of Russian oil, even threatening secondary tariffs. While these measures demonstrate a tough stance from the US, they have generally eased global trade tensions and reduced investors' safe-haven allocations to gold. Analysts point out that if the US-China negotiations achieve substantial progress, gold's "trade war premium" will further diminish, pushing prices to lower levels.
Economic data suspense: Inflation report dominates Fed outlook
Amidst multiple headwinds, the market is turning its attention to upcoming US inflation data. The Consumer Price Index (CPI) will be released on Tuesday, followed by the Producer Price Index (PPI) on Thursday . These data will provide key insights into the Federal Reserve's interest rate path. Money market traders currently see an approximately 85% probability of a September rate cut (up from 90% on Monday), with cuts expected by 58 basis points before year-end. Economists expect the core CPI to rise 0.3% in July, pushing the annual rate to 3%. Federal Reserve officials' concerns about the labor market have signaled their openness to rate cuts, but they may hold off if inflation shows signs of accelerating due to tariffs. The US dollar index rose 0.24% to 98.48 on Monday, reflecting a hawkish market correction ahead of the data releases. Michael Brown, market analyst at London-based online broker Pepperstone, noted that the dollar's strength against major currencies is partly due to a mildly hawkish repricing of Fed policy expectations. Francesco Pesole, ING FX strategist, added that even with a 0.3% month-over-month increase in the core CPI, the Fed still has room to cut rates given the deteriorating labor market. Meanwhile, U.S. Treasury yields fell, with the 10-year yield down 1.2 basis points to 4.271% and the two-year yield to 3.752%, narrowing the spread to 51.5 basis points. Federal Reserve Chairman Powell expects tariffs to push up prices, but Jefferies Chief Economist Thomas Simons believes that weak consumer confidence may hinder inflation, and weakening demand will offset some of the pressure.
Furthermore, Trump's expansion of the Federal Reserve chair candidate pool to include Vice Chairs Bowman and Jefferson, as well as Dallas Fed President Logan, has added to policy uncertainty. If inflation data falls short of expectations, bets on a rate cut will strengthen, benefiting gold. Conversely, if inflation exceeds expectations, further dollar strength will weigh on gold prices.
Market Outlook: Gold rebound needs new catalyst
In summary, the plunge in gold prices is due to a combination of negative factors: tariff exemptions have resolved trade uncertainty, Russia-Ukraine peace talks and the extended Sino-US truce have weakened safe-haven demand, and the outlook for inflation data has put the market on the sidelines. In the short term, gold prices are likely to remain weak, and investors should be wary of further declines. However, in the long term, if the Federal Reserve confirms its path of rate cuts or geopolitical tensions deteriorate again, gold still has the potential to rebound. Kitco analyst Wyckoff emphasized that traders will continue to monitor the prospect of rate cuts, which could be bullish for gold. Faced with uncertainty, investors should remain vigilant and closely monitor inflation reports and summit developments, as the next turning point may be just around the corner. While gold's reputation as a safe-haven asset has been temporarily shattered, its core position in global asset allocation remains a long-term positive.
