Gold recovers above $4,050 as Trump pauses Iran strikes
- Gold price edges higher to near $4,060 in Monday’s early Asian session.
- Trump holds off on Iran strikes on the pledge that the Hormuz agreement is close.
- Fed holds interest rates steady and hints at a rate hike later this year.
Gold price (XAU/USD) attracts some buyers to around $4,060 during the early Asian session on Monday. The precious metal edges higher amid hopes of a breakthrough between the United States (US) and Iran after reports that US President Donald Trump has held off Iran strikes.
Trump cancelled planned military strikes against Iran on the basis of “rapidly” reaching a deal on its nuclear programme and the full reopening of the Strait of Hormuz, per Bloomberg. US President paused the strikes in expectation of a breakthrough and in response to requests from Tehran and other countries in the region, he claimed on his Truth Social platform on Saturday.
Traders will closely monitor US-Iran developments. Any positive progress between the two countries could provide some support to the yellow metal. However, uncertainty remains high as Iranian officials said that Trump’s claim that Tehran had requested a pause “was nothing but a new lie” and that the Iranian armed forces were “on high alert and ready for any eventuality,” per Iran’s Mehr news agency.
Ongoing tensions in the Middle East might cap the upside for the yellow metal as it could push crude oil prices up and prompt central banks to hold rates at elevated levels for longer.
Last week, the US Federal Reserve (Fed) decided to leave the interest rates unchanged in its current target range between 3.50% and 3.75%. During the press conference, Fed Chair Kevin Warsh pledged an unwavering commitment to bring inflation down. 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.
Oil rebound revives inflation worries and supports gold
Commerzbank’s FX Research team notes that the latest geopolitical flare-up has had a swift impact on energy markets, with “the renewed escalation largely reversed the sharp decline in oil prices seen earlier this week and reignited concerns over the inflation outlook.” In their view, the combination of a Brent rebound, lingering inflation risks and the Fed’s focus on price stability is encouraging investors to re-engage with Gold as a hedge against both inflation and market volatility, alongside higher long-end US yields.
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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