Gold prices to drop? Analyst decodes near-term strategy amid tariff threats

Considering the US GDP data, weekly job report, hot PCE report and calm in the wider markets despite tariffs, gold is susceptible to further decline in the near-term, says Praveen Singh of Mirae Asset

Gold: Recovers on lower yields but remains vulnerable

Performance:

On July 29, spot gold tumbled on reassuring US GDP and ADP data and closed solidly lower as bears tested the 100-DMA support at $3,268.

Despite a hotter-than-expected US PCE Price Index released on July 31, the yellow metal, at the time of writing this article, was changing hands at $3,296, up around 0.6 per cent for the day. Its recovery was driven by slightly lower US yields and tentative safe haven buying ahead of the August 1 tariff deadline.

Still, the metal is down nearly 1.2 per cent this week.

Data roundup:

US PCE Price Index (June) rose 0.3 per cent Month-on-Month (M-o-M), matching the forecast of 0.3 per cent but higher than the revised 0.2 per cent increase observed in May, while year-on-year (Y-o-Y) increase was 2.6 per cent vs the forecast of 2.5 per cent, which was higher than the revised 2.4 per cent increase in May.

Core PCE registered an increase of 0.3 per cent M-o-M, which was in line with the forecast of 0.3 per cent, but was higher than the prior reading of 0.2 per cent. Core PCE Y-o-Y at 2.8 per cent moved further away from the Fed's target of 2 per cent as it turned out to be hotter than the expected reading of 2.7 per cent, as even prior data was revised higher from 2.7 per cent to 2.8 per cent. Employment cost index in Q2 at 0.9 per cent was higher than the estimate of 0.8 per cent. Initial jobless claims and continuing claims were lower than their respective forecasts. 

Earlier, US data released on July 30 showed that a pickup in net exports added 5 per cent to GDP growth in Q2, which boosted the inflation-adjusted US growth to an annualised pace of 3 per cent in Q2 vs the forecast of 2.6 per cent. However, the economic growth in the first half of 2025 averaged merely 1.25 per cent, slower than the 2024 pace. Final sales to private domestic purchases rose 1.2 per cent in Q2, the slowest growth since the end of 2022. ADP employment change came in at 104K vs the forecast of 76K.

FOMC monetary policy decision:

The Fed's monetary policy decision announced on July 30 was somewhat hawkish. The central bank kept the rates unchanged at 4.25 per cent-4.50 per cent. The Fed Chair said that they have not made any decisions regarding the September meeting, as more data is needed to act amid uncertainty over tariff impacts. Odds of a September rate cut have dipped to below 50 per cent.

US Dollar Index and yields:

The US Dollar Index firmed up on hawkish FOMC outcome. At the time of writing, the Index was hovering around 99.97, up 0.15 per cent on the day, and at a 2-month high.

Notwithstanding positive US data, ten-year US yields dipped 3 basis points (bps) to 4.34 per cent; 30-year yields eased by 2 bps to 4.88 per cent, too.

Upcoming data:

Today, the US nonfarm payroll report (July) will be released. The report will be crucial as investors look for clues to Fed rate cuts. A weakening job market would increase the odds of a rate cut.

In addition, ISM manufacturing (July) and University of Michigan sentiment and inflation expectations (July final) data will also entertain investors.

Tariff developments:

Trump's tariffs on Mexico have been delayed for 90 days as trade talks will continue. It is to be noted that the US, citing fentanyl smuggling, has slapped 25 per cent tariffs on Mexico.

The US has levied a 15 per cent tariff on South Korea and has also included major investments in American energy and shipbuilding in the trade agreement. The Trump administration has imposed 40 per cent tariffs on Brazil and has called the tariffs necessary as the administration sees Brazil's policies threatening US national security.

President Trump was not hopeful of a trade deal with Canada as the nation prepared to recognize a Palestinian state.  ALSO READ | Trump issues order imposing tariffs on 70 nations, India gets 25% hit

Challenge to Trump's tariffs:

A group of small businesses and states has challenged the legality of Trump's tariffs in court. They argued that no emergency exists to allow the President to skip legal steps to impose tariffs.

The US Court of Appeals for the Federal Circuit in Washington heard oral arguments on Thursday, but it may take weeks to deliver the verdict. Even then, the case may drag on for months as it may finally end up at the US Supreme Court. The Trump Administration has used the International Emergency Economic Powers Act (IEEPA) to impose tariffs.

Gold demand soars in Q2:

As per the World Gold Council, gold demand rose 3 per cent to 1,249 tons in Q2 on robust investment activities as investors hedged economic and geopolitical risks.

Asian-listed funds accounted for 70 tonnes, while bar and coin demand increased by 11 per cent Y-o-Y. The central banks continue to buy gold as they added 166 tons in Q2, but it was the lowest level since 2022.

The World Gold Council's annual central bank survey found that 95 per cent of reserve managers believe global central bank gold reserves will increase over the next year. Total gold supply increased 3 per cent to 1,249 tons as mine production rose to a fresh Q2 record. Recycling was up by 4 per cent Y-o-Y.

Gold ETF and Comex inventory:

Total known global gold ETF holdings fell for the third straight day and were noted at 91.646MOz as of July 30. Nonetheless, gold holdings are at a 2-year high level and are up 10.60 per cent year-to-date (YTD).

Comex gold inventory currently stands at 38.51 MOz, down nearly 14 per cent from the all-time high level of 45.07 MOz seen on April 4.

Outlook:

Considering the US GDP data, weekly job report, hot PCE report and calm in the wider markets despite tariffs, gold is susceptible to further decline in the near-term. A hawkish Fed is bearish for the metal in the short term.

A weak US nonfarm payroll report may lend some support to the metal, though. Unless US-China tension flares up once again, gold may remain under pressure, though investors need to monitor US-India trade developments also as Trump is trying to target Russia through secondary tariff threats on Russian oil purchases by China and India.

Gold may decline to $3,228 (MCX October gold contract ₹97,000)/$3,200 (₹96,000) in the coming weeks, though medium-to-long term fundamentals remain constructive. Interim support is at $3,268 (₹98,000).

Resistance is at $3,350 (₹1,00,500)/$3,375 (₹1,01,100). Exchange risk exists due to US-India trade frictions.

(Disclaimer: Praveen Singh is associate vice president of fundamental currencies and commodities at Mirae Asset Sharekhan. Views expressed are his own.)