Gold corrects as easing US-China tensions cools the mania for the metal

An unexpected US-China trade deal and a sharp reversal in momentum has sparked a correction in gold prices.

The prospect of a US-China trade deal sucks the heat out of gold

Gold prices are down almost 10% from all time highs after an unexpected breakthrough in US and China trade relations. High level delegates of both countries, including Treasury Secretary Scott Bessent and Vice Premier He Lifeng, met in Malaysia to discuss trade relations in Malaysia last weekend. It was expected the meeting would yield commitments to back away from threats to curb rare earth exports and tariff hikes. However, the meeting delivered much more: a surprise, preliminary commitment from both sides to a comprehensive trade agreement. The deal, mooted to be signed by US President Donald Trump and Chinese President Xi Jinping on the sidelines of the ASEAN summit in South Korea this week, would address many of the major sticking points in recent trade negotiations. This includes delaying rare earth export curbs, cuts to tariffs, reduced shipping levies, and fresh commitments to fight the flow of fentanyl.

Tailwinds to gold diminish as price momentum turns lower

As we wrote about several weeks ago, the rise in gold prices had been driven by five factors: expectations of US interest rate cuts, threats to the independence of the US Federal Reserve, loose fiscal settings across the globe, geopolitical risks, and US trade policy. The dynamics had put downward pressure on yields at the front of the Treasury curve, softened the US Dollar, and drove investors and central banks to reduce exposure to USD denominated assets and shift into gold instead. Market sentiment and momentum following also played a role, with gold prices exhibiting signs of mania in the week prior to pulling back from its record highs.

From a fundamental standpoint, the improvement in US and China relations weakens two drivers of gold: US trade policy and geopolitical risks, the latter which was also eased by recent positive developments in the Middle East. While expectations of aggressive US interest rate cuts and profligate fiscal policy by governments around the world remain powerful tailwinds, the bullish impetus for gold, at the margins, has diminished because of the US-China trade breakthrough.

Gold’s uptrend challenged with the market at a crossroad

The blow-off in gold exhibited signs of a melt-up following a period of speculative mania. The exit of hot money from the market has put downward pressure on gold and caused heightened intraday volatility.

The correction in prices saw gold break upward sloping trend-line support, with the daily RSI threatening to break below 50 – a move associated with negative price momentum. Critical support sits around $US3945, a break of which could invite greater downside in prices.

Price action is carving out a descending wedge pattern however, signalling this move could be corrective rather than a reversal. A break-out might see the price re-test resistance at the 20-day moving average and retry its uptrend.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)