The price of gold exceeded 5,000 USD per ounce for the first time ever. The price has increased by more than 650 USD just in January. Last week's rise of 8.5% was the largest weekly increase ever in USD value. It was also the largest percentage increase since the panic during the COVID pandemic in March 2020. The price of silver also exceeded 100 USD per ounce and has risen by 44% this year.
The flight to safe assets occurs when the market prepares for three threats: increased tariffs between the USA, Canada, and China, possible intervention in the yen, and a greater risk of an American shutdown.
The rise in gold shows decreased confidence
TD Securities strategist Daniel Ghali told the Wall Street Journal that the gold rally is linked to issues of trust in the global financial system. Trust has been shaken but not broken, he explained, and he suggested that if it breaks, the price increase could continue much longer.
Several factors are driving the rise in gold. The dollar has weakened following Trump's involvement in Venezuela, pressure on Fed Chair Jerome Powell, and tariff threats against Greenland. The Fed's interest rate cuts have lowered yields on government bonds and money market funds, which reduces the opportunity cost of gold.
China has bought gold for 14 months in a row, and Poland's central bank recently approved a large purchase. Cyclically adjusted P/E ratios indicate that stock valuations are now at their highest level since the tech bubble in 2000. Investors are therefore seeking alternative assets.
Three risks that the markets are following
In addition to the flight to gold, there are three specific factors that are increasing investors' concerns this week.
Tariff dispute between the USA, Canada, and China
President Trump threatened to impose a 100% tariff on Canada if the country continues with a free trade agreement with China. Canada's Prime Minister Mark Carney protested immediately and said there are no plans for an FTA with China.
'In the agreement with the USA and Mexico, there is a commitment not to negotiate free trade agreements with non-market economies without first informing,' said Carney. 'We have no intention of doing so with China or any other such economy.'
Canada instead made a smaller agreement in response to China's tariffs. In 2024, Canada followed the USA's policy and imposed a 100% tariff on Chinese electric cars and 25% on steel and aluminum. China responded with a 100% tariff on Canadian canola oil and 25% on pork and seafood. Canada has now lowered the electric car tariff to 6.1% in exchange for an annual cap of 49,000 cars - about 3% of Canada's total car sales.
The problem is that Trump called this 'one of the worst deals in history' and kept the pressure up all weekend. Treasury Secretary Scott Bessent said on ABC: 'We cannot allow Canada to become a bridge for cheap Chinese goods to the USA.'
Trump also mocked Canada on social media, writing: 'China is taking over what was once The Great Country of Canada. Sad. I just hope they leave hockey alone!' The market is concerned about a coordinated counterattack from Canada and China on Monday.
Threat of intervening in the yen
The yen strengthened 0.7% to 154.58 per USD. Japan's Prime Minister Sanae Takaichi warned of measures against 'abnormal movements' and rumors spread that the Federal Reserve Bank of New York contacted banks to inquire about the yen price. The market interpreted this as a signal that the USA may assist Japan with currency support.
Matt Maley, chief strategist at Miller Tabak, told Bloomberg that most attempts to strengthen the yen would only lift long-term interest rates, which puts Japanese policymakers in a difficult position without a clear solution.
The yen is often used for so-called carry trades. If real intervention occurs, it could force investors to close their positions, increasing volatility in risky assets.
Increasing risk of government shutdown in the USA
The budget agreement expires on January 31 and is once again an issue. Kalshi's prediction market shows that the risk of a shutdown is now 78.5%. Senate Democratic leader Chuck Schumer announced that the Democrats are saying no to funding the Department of the Interior after two fatal shootings by ICE agents in Minnesota.
Six of the twelve annual spending proposals have been passed, but Republicans need Democratic help to get the rest through before Friday's deadline. Senator Patty Murray, the Democrats' top name on the budget committee, suddenly changed her tune and said: 'Federal agents cannot murder people in broad daylight without consequence.'
Unlike October when the government was shut down for 43 days, some departments already have a full-year budget - for example, the justice, trade, domestic, and agriculture departments. A total shutdown is therefore unlikely. However, parts of the government would be affected, and the Senate will not reconvene until Tuesday due to a snowstorm.
Key events this week and their significance
The Fed's board meets on January 29. They are expected to leave the interest rate unchanged, but Trump is pushing for a cut. He announced that he will soon appoint Powell's successor, which increases uncertainty. The USA's budget expires on January 31, and Japan has elections on February 8. Important reports from Microsoft and Tesla are also coming this week.
The trading volume for Bitcoin surged over the weekend, suggesting that investors are already beginning to worry. Three headwinds are gathering before the US market even opened, and Trump's tariff threats are causing concern again. If the pattern holds, a weak market could quickly lead to tariffs being withdrawn, but until then it is likely to be volatile.
Record levels in gold and silver clearly show: the market is seeking safety.
