Gold price (XAU/USD) delivers a swift recovery as investors are confident about an interest rate cut by the Federal Reserve (Fed) at its monetary policy meeting on March 20 – such a move would support non-yielding assets such as Gold. The probabilities of an early interest rate cut are assessed as firmer despite consumer price inflation in the United States remaining stubbornly high in December, amid a significant increase in rental prices and healthcare costs.
While market participants continue to commit funds toward Gold amid optimism over early rate cuts, Fed policymakers will stick to a restrictive interest rate stance as price pressures in addition to the required rate of 2% are highly sticky, due mainly to stable labor market conditions. Fed policymakers have been reiterating that a lot of work has yet to be done in order to gain confidence that the underlying inflation will return to 2% in a sustainable manner.
Bank of Chicago Federal Reserve President Austan Goolsbee, on Thursday, stressed a data-dependent approach and said that there were weeks and months of data to come, to help guide when and how much rates should be reduced. Cleveland Fed President Loretta Mester said she needed more evidence to confirm inflation declining towards 2% in a timely manner before jumping on the bandwagon of rate-cut discussions.
Gold price delivers a V-shape recovery after printing a fresh three-week low below $2,015. The 50-day Exponential Moving Average (EMA) has acted as a strong support for the Gold price bulls. The precious metal has managed to climb slightly above the 20-day EMA, which trades around $2,036. While the upside bias is intact, a bullish momentum has faded as the 14-period Relative Strength Index (RSI) is oscillating near 50.00.
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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