Gold price (XAU/USD) slumps to around $4,967.70 during the early Asian session on Monday. The precious metal faces selling pressure as uncertainty surrounding the monetary policy announcement by major central banks this week is dominating the intense geopolitical conflict in the Middle East. Traders will closely monitor the developments surrounding the United States (US)-Israel war with Iran, a scenario that typically boost the demand for safe-haven assets.
The US President Donald Trump administration said that they expect the conflict in Iran to come to an end within weeks or “sooner.” Meanwhile, Israel’s military noted that it plans for its campaign to continue for at least three more weeks.
Over the weekend, US forces targeted every military site on Kharg Island, a critical Iranian oil export hub. Iran has threatened to retaliate against any US-linked oil facilities in the region.
Although war is generally expected to boost the Gold price, the current growing tensions have led to an increase in oil costs. This, in turn, has fueled concerns about inflation and led markets to believe that the Federal Reserve (Fed) will delay cutting interest rates, which is negative for non-yielding assets, such as Gold.
Apart from the Fed, the Reserve Bank of Australia (RBA), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Bank of England (BoE) are scheduled to announce their monetary policy decisions this week. All central banks are expected to leave interest rates unchanged at their current levels, except the RBA, which is expected to raise them again.
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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