Gold Outlook: Bulls Gain Strength on US Fiscal Concerns and China Demand

Since the V-shaped reversal on May 15, gold bulls have taken the driver’s seat. The recent rally has been fueled by multiple tailwinds: Moody’s downgrade of the U.S. credit outlook, the House passage of Trump’s sweeping tax bill, and robust demand from China. That said, gold's upside appears capped by the Fed’s cautious stance on rate cuts and easing concerns over major geopolitical flare-ups.

On the XAUUSD daily chart, we saw a sharp pullback early last week, followed by a strong recovery that pushed prices back above the $3,200 mark by the weekly close — suggesting solid dip-buying interest. Momentum has continued to build into this week, with gold reclaiming the $3,300 level and breaking above its 8-day EMA. Bulls are now testing the 61.8% Fibonacci retracement from the May 7 decline, around $3,317.

A decisive break above this level could open the door for a move toward $3,400 - or even a retest of the record high at $3,450. On the downside, initial support is seen at the May 15 trendline and former resistance around $3,168.

The first leg of the rebound was sparked by Moody’s warning that an extension of the 2017 Tax Cuts and Jobs Act could add an estimated $4 trillion to the U.S. structural deficit over the next decade, excluding interest costs. By 2035, the deficit could reach 9% of GDP. This raised fresh concerns about the long-term health of U.S. public finances.

Then, in the early hours of May 22, Trump’s tax bill passed the House - a move that further complicates the deficit picture. With tariffs trending lower, the fiscal gap may become even harder to close. Bond markets reacted swiftly: the yield curve steepened significantly, with 30-year Treasury yields spiking to 5.15%, and term premiums climbing sharply.

Rising yields typically weigh on gold, a non-yielding asset. But in this case, the yield surge wasn’t driven by expectations of stronger growth - it reflected deepening skepticism over U.S. fiscal discipline. This paradoxically bolstered gold’s appeal as a hedge against sovereign risk.

From a medium- to long-term perspective, while an outright U.S. default remains unlikely, rising credit risks and potential debt dilution are likely to spur central banks to diversify their reserves - and gold stands to benefit from that trend.

Meanwhile, China's physical gold demand continues to provide a strong floor. In April, China’s gold imports surged 73% from March, reaching the highest level in 11 months. The People’s Bank of China has reportedly raised gold import quotas for commercial banks to meet insatiable demand from both institutional and retail investors. At a time when global ETFs are seeing persistent outflows, China’s buying serves as a crucial anchor for gold bulls.

However, despite all these tailwinds, gold has so far failed to break above key resistance at $3,317. On one hand, while U.S. survey data like the University of Michigan’s consumer sentiment index remain subdued, “hard data” such as April’s CPI and retail sales have stayed resilient - giving the Fed little urgency to cut rates. On the other hand, recent signs of diplomatic progress - including in U.S.-Iran and Russia-Ukraine negotiations - have dampened safe-haven demand.

All in all, gold has bounced off the lows and bulls have regained control. The downgrade, tax bill progress, and strong Chinese demand have pushed prices higher. But amid solid U.S. economic data and improving geopolitical sentiment, gold may lack the fuel for a full-blown breakout. In my view, a period of consolidation is likely in the near term.

Looking ahead, the U.S. core PCE data on Friday will be closely watched. Any signs of sticky inflation could reinforce the Fed’s wait-and-see approach - a potential headwind for gold. Beyond inflation data, markets will also focus on Senate deliberations over the tax bill, long-end Treasury auctions, and the trajectory of yields as a barometer for fiscal risk.

As for trade tensions, Trump has indicated that tariff rates on key trade partners will be finalized within 2-3 weeks, with pressure notably on the EU and Japan. However, since both parties are already in talks with Washington, the near-term market impact may be limited.

That said, if the tax bill ultimately clears the Senate and the 90-day tariff freeze nears its end, mounting fiscal pressure could complicate phase-two negotiations - potentially adding to market volatility and reigniting demand for gold as a safe haven.

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