Gold price (XAU/USD) faces some selling pressure around $4,910 during the early Asian session on Friday. The yellow metal tumbles over 3.50% on the day, with algorithmic traders appearing to amplify the precious metal’s sudden drop. Traders will closely monitor the release of the US Consumer Price Index (CPI) inflation report for January, which will be released later on Friday.
Concerns about Artificial Intelligence (AI) spurred a sell-off across financial markets, with margin calls also likely adding to the downtick. “Margin calls also likely added to the selloff, with some investors forced to exit positions in commodities, including metals to provide liquidity,” said Nicky Shiels, head of metals strategy at MKS PAMP SA.
Furthermore, stronger-than-expected US January employment data firmed expectations that there won’t be a Federal Reserve (Fed) rate cut soon. This, in turn, reduces the appeal of holding non-yielding Gold.
Nonfarm Payrolls (NFP) rose by 130,000 jobs in January, following a downwardly revised 48,000 increase in December, according to the US Bureau of Labor Statistics (BLS) on Wednesday. The Unemployment Rate edged down to 4.3% in January from 4.4% in December.
Traders brace for the US CPI inflation data on Friday for more cues on the Fed’s monetary policy path. The headline and core CPI are projected to show an increase of 2.5% YoY in January. Any signs of softer inflation could revive some rate cut bets and boost the precious metal in the near term.
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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