Gold extends rally amid renewed trade tensions and the return of war fears

Gold is extending its rally for a third consecutive session, reclaiming the $3,340 per ounce level in early Friday spot trading.

The rebound comes as trade tensions flare once again, this time following U.S. threats to impose steep tariffs on Canada and Mexico, which represent escalations that have undermined hopes for comprehensive agreements to end the broader global trade conflict.

Although markets have become somewhat desensitized to President Donald Trump’s recurring tariff threats, concern is growing over the possibility that a deal with Canada may not be reached, particularly one that removes all tariffs. Experts cited by the Wall Street Journal warn that it may not be safe to assume Trump will back down this time.

In contrast, the situation with Brazil appears more complex. The BRICS member may prove more resistant to Washington’s pressure, with President Lula da Silva reportedly inclined toward confrontation. Given the country’s limited reliance on the U.S. as an export market, Brazil is seen as capable of withstanding tariffs of up to 50%, according to aides interviewed by the Washington Post.

These developments reinforce the likelihood of actual tariffs being imposed by August 1, reviving concerns over their potential implications for the U.S. economy—aside from the unresolved negotiations with China.

This uncertainty may encourage the Federal Reserve to maintain its hawkish stance and keep interest rates elevated. Had sweeping trade agreements been finalized, the Fed might be more confident that inflation is headed toward target, opening the door to rate cuts. However, the Fed remains unsure whether the inflationary effects of tariffs will be transitory or long-lasting, prompting a wait-and-see approach. Moreover, the lag in data reflecting those effects may delay any policy shift.

Even if the Fed ultimately concludes that a rate cut is warranted, June’s FOMC minutes show officials consider current rates to be not far from neutral.

This tightening bias could restrain economic growth, thereby preserving gold’s appeal. Although higher interest rates usually weigh on gold by lifting bond yields, the historical inverse relationship between gold prices and 10-year Treasury yields has turned positive again since June, with the correlation coefficient now near 0.5. In other words, recent bond selloffs may be indirectly fueling albeit moderately, demand for gold.

In the Middle East, geopolitical tensions are showing signs of escalation once again, potentially reviving concerns about global energy supply disruptions and offering renewed, if temporary, support for safe havens. The New York Times reports that Israel has concluded that part of Iran’s highly enriched uranium stockpile survived recent U.S. and Israeli airstrikes.

This raises fears of a renewed military conflict—which I believe is increasingly likely. At the same time, Houthi attacks on Red Sea shipping lanes are also intensifying. Nevertheless, the market’s reaction may remain muted as long as Iran’s export infrastructure is intact and the Strait of Hormuz remains open for oil shipments—just as it was during the previous round of hostilities, which ultimately weighed on both gold and oil prices.