Gold Price Forecast: XAU/USD holds positive ground above $4,100 as Fed rate cut expectations rise
- Gold price drifts higher to around $4,120 in Tuesday’s early Asian session.
- Market participants are betting on a 25 bps Fed rate reduction next month, partly due to weak job market data.
- US Senate compromise sets the stage for an end to the US federal shutdown.
Gold price (XAU/USD) holds positive ground near $4,120 during the early Asian session on Tuesday. The precious metal edges higher after reaching a two-week high in the previous session, amid prospects for rate cuts by the US Federal Reserve (Fed) in December and a softer US Dollar (USD). The US ADP Employment Change Weekly will be in the spotlight later on Tuesday.
The rally in yellow metal is bolstered by increased market expectations of a US rate cut next month after private jobs and consumer reports last week both showed signs of economic slowdown. Markets are currently priced in nearly a 67% chance of a 25 basis points (bps) rate cut by the Fed in December, with odds rising to about 80% by January, according to the CME FedWatch tool. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
On the other hand, hopes for the end of the US government shutdown and positive market sentiment could undermine the safe-haven asset like Gold. Reuters reported that the US Senate on Sunday moved forward on a measure aimed at reopening the federal government and ending the shutdown, which has affected federal workers, food aid, and air travel.
US President Donald Trump on Monday expressed support for the bipartisan deal to end the US shutdown, saying “we have support from enough Democrats, and we’re going to be opening up our country.” Given that the House needs to return to Washington and has vowed to give lawmakers advance notice, the government will most likely reopen by the end of the 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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