Gold prices have surged, surpassing $3,100 per troy ounce, driven by uncertainty surrounding US tariffs. Over the past quarter, Gold rose by 19%, marking the strongest increase since 1986.
Concerns over reciprocal tariffs from Europe and China are prevalent. The anticipated inflation from these tariffs is affecting the US real interest rate, benefiting Gold prices.
Impact Of Inflation On Real Yields
However, experts do not expect the US Federal Reserve to initiate interest rate cuts imminently due to inflation risks, suggesting potential for a price correction in Gold.
This surge in gold suggests heightened concern over future economic friction, particularly regarding the possible amplification of tariff measures. With tit-for-tat duties on the table from both European and Chinese authorities, markets seem to be aligning themselves in anticipation of a knock-on effect—namely inflation penetrating into core pricing dynamics rather than remaining contained in the tradable sector. That’s beginning to feed directly into real yields.
As real interest rates are being eroded, at least temporarily, we find commodities such as gold becoming more attractive given their role as a store of value. Investors appear to be front-running further monetary deterioration, which partially explains the pace we’ve seen in the recent upward move. The 19% jump, which is already historic in its own right, reflects a recalibration across multiple asset classes, but notably metals and fixed income.
Even so, Powell’s public stance implies the Federal Reserve remains tethered to its dual mandate, especially the inflation side of the remit. Despite market appetite for rate reductions, the Fed appears unwilling to encourage expectations of lower borrowing costs in the near term. That scepticism, or rather caution, from policymakers not only opens the door to a temporary pause in gold but could also reintroduce volatility if positioned too aggressively into long exposure.
Market Positioning And Potential Pullbacks
In our reading, some of the current movement may stem from overly stretched positions, particularly following such a steep quarter. There’s been a notable build-up in futures, evident through open interest gains and an extension in speculative length. If we see even modest unwinds or a recalibration of the inflation narrative—for example from softer CPI prints or easing rhetoric on trade—we could witness a sharp pullback.
From the term structure, we’ve observed backwardation deepen, suggesting a preference for immediate delivery rather than prolonged holding, a pattern that often precedes corrective phases after periods of intense bullishness. Options skew in short-dated maturities is signalling heightened demand for downside protection, and that tends to align with impending turbulence or profit-taking.
We should be cautious in assuming this rally is unchallenged. While macro drivers have fuelled the current run, current pricing does not fully reflect the stickiness of central bank policy. Given that implied volatilities have remained somewhat stable throughout the climb, any spike in rate expectations or even a pause in tariff escalation could spark a reflexive decline in metal prices.
Watching the 10-year breakeven rates alongside inflation swaps might help determine whether inflation expectations continue being repriced. This data will provide more context on whether the rally still has legs or is already over-extended and vulnerable to a shift in sentiment.
We are continuing to monitor positioning metrics, particularly non-commercial contracts and ETF flows, which have been supportive thus far but are liable to shift quickly. Should inflows taper or reverse, especially in physically backed vehicles, that would likely reinforce early signs of retracement and caution toward momentum-based trades.
Ultimately, sustaining price action at these levels assumes a continuation of the current macro trajectory. If inflation data cools just as global dialogue on tariffs softens, that delicate alignment holding up gold prices could begin to unravel. For now, hedging short-term upside while maintaining awareness of tactical downside setups appears prudent.
