Gold price (XAU/USD) extends its two-day losing spell as investors turn cautious ahead of the interest rate decision by the Federal Reserve (Fed). The precious metal falls sharply even though markets widely expect that the Fed will keep interest rates unchanged in the 5.25%-5.50% range. However, a hawkish interest rate outlook is highly anticipated as robust spending by households and strong labor market conditions keep upside inflation risks alive.
Fed Chair Jerome Powell and his colleagues may keep the likelihood of further policy tightening on the table as the progress in inflation easing toward the 2% target has slowed due to strong wage growth. US households having high purchasing power are spending heavily, keeping core Personal Consumption Expenditure (PCE) price index relatively stubborn.
Apart from the upcoming Fed decision, the broader appeal for Gold is still upbeat as Middle East tensions persist. The Israeli army is preparing for the ground incursion in Gaza as Israeli authorities rejected calls for a ceasefire.
Gold price faced an extended sell-off while attempting to stabilize above the psychological resistance of $2,000. The precious metal drops sharply on expectations that the Fed will keep the door open for further policy tightening. The yellow metal has been trading in a range between $1,960 and $2,010 for the past week. Volatile action is widely anticipated after the Fed’s policy announcement. Momentum oscillators continue to trade in a bullish trajectory.
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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