Gold rally faces stiff tests as tariff fears and policy uncertainty add price premium
While gold has hit record levels, investors remain nervous thanks to recent geopolitical and policy changes, with significant uncertainty about tariffs and their effect on market volatility.
In its latest monthly report, however, the World Gold Council (WGC) says the market volatility is actually likely to add a meaningful premium to gold prices.
The WGC also believes the recent record-breaking rally in gold prices may also impact future market directions.
Record month
Gold finished March with a month-on-month gain of 9.9%, with even a materially weaker US dollar – primarily via euro strength – unable to prevent it making new highs across all other major currencies.
The WGC said that, according to its gold return attribution model, an increase in geopolitical risk capturing tariff fears was a key driver of gold’s performance, alongside the euro strength.
March saw a continued run of gold ETF buying, with US funds leading the charge, followed by Europe then Asia.
Downside risks
However, the WGC warned there are certain risks for the gold price after such a strong rally in such a short space of time.
“Treasury managers at central banks could prudently slow their pace of buying given the price rally, as we saw with some central banks last year,” the WGC noted.
“While consumer demand adapts to higher prices eventually, the speed of price moves is likely to dampen net buying in the near term.”
“A liquidity crunch could negatively affect gold as the most liquid assets are sold to meet margin calls.”
Tariff uncertainty
“Additionally, geopolitical and policy nervousness is quite elevated, particularly given significant uncertainty about tariffs and their effect on market volatility, which is likely adding a meaningful premium to gold prices.”
“Any resolution could bring that premium out, as we have seen in previous historical periods.”
The WGC also noted that while quantitative tightening is slowing, there has been no mention of a resumption of quantitative easing.
“Indeed, the appetite might not be there given the high levels of debt and sticky inflation.”
Fundamentals remain in place
The WGC noted that, while the hot run on gold prices had taken many by surprise, the market fundamentals remain in place.
“Gold is not a commodity in the traditional sense and primary production’s response may have only limited impact on price.”
“The willingness to hold and reluctance to sell – given current extreme policy uncertainty – could generate real momentum.”
“By historical standards, the current rally isn’t particularly large or long [and] comparing the current rally to the recent 2011 and 2020 peaks highlights the fact that, relatively speaking, those fundamentals [currently] look more solid.”