Gold drifts higher above $4,050 as US PPI unexpectedly fell in June
- Gold price recovers to near $4,060 in Thursday’s early Asian session.
- The US PPI unexpectedly fell in June.
- The US military carried out another wave of strikes.
Gold price (XAU/USD) edges higher to around $4,060 during the early Asian session on Thursday. The precious metal rebounds as softer US inflation has fueled hopes that the US Federal Reserve (Fed) will hold rates steady at the upcoming July policy meeting.
Producer inflation in the United States, as measured by the change in the Producer Price Index (PPI), declined to 5.5% YoY in June from 6.0% in May (revised from 6.5%), the US Bureau of Labor Statistics (BLS) reported on Wednesday. This reading came in softer than the market expectation of 6.2%. On a monthly basis, the PPI declined by 0.3%, compared to the 0.6% increase seen in May (revised from 1.1%) and improved compared with the estimate for no change.
Traders see about a 10.2% probability of a rate hike at the Fed's July meeting, versus 16.6% before the data, according to the CME FedWatch Tool. Earlier on Tuesday, U.S. consumer inflation also slowed more than expected in June.
"Gold has pared losses from earlier this morning as PPI came in lower than expected and eased some of those concerns about the Fed having multiple interest rate hikes this year," said Phillip Streible, chief market strategist at Blue Line Futures.
On the other hand, escalating US-Iran hostilities and airstrikes around the Strait of Hormuz have pushed crude oil prices up and could prompt central banks to hold rates at elevated levels for longer, weighing on gold's appeal as a non-yielding asset.
The BBC reported that the US had launched fresh strikes against Iran on Wednesday evening as US President Donald Trump warned Tehran it "better behave”. Iran's top negotiator, Mohammad Bagher Ghalibaf, said that Tehran had "no reason" to abide by the deal if it did benefit from it. On Tuesday, Trump had threatened to attack bridges and power plants should Iran not return to talks next week.
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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