Gold price (XAU/USD) declines to near $4,050 during the early Asian session on Tuesday. The precious metal eased slightly from the recent rally after the US paused planned airstrikes against Iran. Traders will closely monitor the developments surrounding US-Iran talks for fresh impetus.
Bloomberg reported on Monday that US President Donald Trump said his latest offer of talks is a “last chance” for Iran after he called off what he said was a major attack on the Islamic Republic. Trump said he expected negotiations to begin in the next day or two to reopen the Strait of Hormuz and create a pathway for Iran to address the US’s concerns about its nuclear programme.
Iran denied it was negotiating with the US but said talks with Oman to get more ships moving through the critical waterway are making progress.
Uncertainty in the Middle East remains high despite hopes of a breakthrough between the US and Iran. Any signs of escalating tensions between the US and Iran could push crude oil prices up and prompt central banks to hold rates at elevated levels for longer. It’s worth noting that Gold is often used as a hedge against inflation but does not yield interest, making it less attractive when interest rates are high.
The US Federal Reserve (Fed) decided to hold the interest rates steady in its current target range between 3.50% and 3.75% at its July policy meeting last week. During the press conference, Fed Chair Kevin Warsh pledged an unwavering commitment to bring inflation down. Traders await the US jobs data on Friday for more clues about the US interest rate path.
Gold upside seen capped by lingering Fed hike expectations
According to analysts at Commerzbank, the outlook for bullion remains constrained by the policy path in the US. They argue that “the persistent expectation of Fed interest rate rises should counteract any rise in the gold price,” with ongoing speculation about further tightening limiting investors’ willingness to chase the recent rally.
Gold FAQs
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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