Gold News: Prices Surge on Trade War Fears, But RSI Signals Overbought—Reversal Ahead?

Gold Prices Extend Rally as Trade War and Inflation Fears Drive Demand

Gold prices continued their upward momentum on Wednesday, posting a higher high for the fifth consecutive session. The market remains in strong bullish territory, but with prices pulling away from support at $2,790.17, traders should be mindful of a potential near-term correction. While gold’s overall trend remains intact, the risk of a daily reversal is increasing as the rally extends.

At 12:01 GMT, XAU/USD is trading $2868.24, up $25.95 or +0.91%.

US-China Trade War Fuels Safe-Haven Demand

Gold jumped 1% in early Wednesday trading, reaching a record high of $2,869.68 before retreating slightly. U.S. gold futures advanced 0.7% to $2,895 as escalating tensions between the U.S. and China drove investors toward safe-haven assets.

China retaliated against newly imposed U.S. tariffs with its own set of trade restrictions, reigniting fears of a prolonged economic standoff. President Donald Trump stated he was in no rush to negotiate with Chinese President Xi Jinping, signaling that tensions may persist. The renewed trade war has heightened concerns over inflation and potential recession risks, pushing gold prices higher as traders hedge against economic uncertainty.

Federal Reserve Caution and Inflation Concerns

Three Federal Reserve officials warned this week that escalating tariffs could add to inflationary pressures. One policymaker suggested that uncertainty over inflation trends may warrant a more measured approach to rate cuts. Traders are closely watching economic data releases, including the ADP employment report and upcoming payroll figures, for further clues on the Fed’s interest rate path.

Gold, traditionally seen as an inflation hedge, benefits from rising consumer prices. However, higher interest rates could limit further gains by increasing the opportunity cost of holding non-yielding assets like bullion. The market remains sensitive to any signals from the Fed regarding its stance on inflation and monetary policy.

Bond Market Moves as Traders Await Jobs Data

The 10-year Treasury yield slipped 3 basis points to 4.478%, while the 2-year yield fell to 4.193%, reflecting growing caution among bond investors. The bond market’s movements align with expectations for key employment data later this week, which will provide insight into the strength of the U.S. labor market.

Federal Reserve Vice Chair Philip Jefferson stated that policymakers must carefully assess economic conditions before adjusting interest rates. While inflation is gradually easing, the Fed remains watchful, particularly as trade tensions introduce new economic risks.

Overbought Conditions Raise Correction Risk

Gold’s relative strength index (RSI) has reached 76, well above the 70 threshold that signals overbought conditions. While further upside remains possible, traders should be cautious of a potential pullback. The market’s strong rally leaves room for profit-taking, especially if upcoming economic data supports a more hawkish stance from the Fed.

Global gold demand increased 1% to a record 4,974.5 metric tons, driven by heightened investment activity and central bank purchases in the fourth quarter, according to the World Gold Council. This strong demand backdrop provides longer-term support for gold, even as short-term price movements remain volatile.

Gold Market Outlook

While gold remains in an uptrend, current overbought conditions and shifting interest rate expectations introduce near-term correction risks. Traders should watch for potential reversals, especially if upcoming U.S. economic data suggests resilience in the labor market, which could strengthen the dollar and weigh on gold.

Barring any unexpected geopolitical events, gold could see a temporary pullback before resuming its broader uptrend. However, ongoing trade tensions and inflation fears continue to support gold’s appeal as a hedge, keeping the metal well-positioned for future gains.

More Information in our Economic Calendar.