Gold edges lower on Middle East tensions ahead of key US employment report
- Gold trades lower near $4,463 as geopolitical tensions in the Middle East continue to fuel uncertainty.
- The lack of tangible progress in talks between the US and Iran supports expectations of higher inflation and elevated interest rates.
- Markets are now focused on the US May employment report for clues on the future path of monetary policy.
Gold (XAU/USD) trades around $4,463 on Friday at the time of writing, down 0.26% on the day, as investors reduce exposure ahead of the release of the US May employment report. The precious metal remains volatile amid persistent tensions in the Middle East and uncertainty surrounding the outlook for US monetary policy.
Market sentiment is being weighed down by the lack of tangible progress in negotiations aimed at easing tensions between the United States (US) and Iran. Iranian Foreign Minister Abbas Araghchi stated this week that no significant progress had been achieved in the discussions, while warning that any further military escalation in the region could reignite the conflict. These comments contrast with remarks from US President Donald Trump, who said that negotiations are in their final stages.
Geopolitical concerns continue to fuel worries about global inflation, particularly due to risks to energy supplies. According to TD Securities strategist Bart Melek, higher inflation expectations linked to the supply shocks have contributed to rising US Treasury yields and continued strength in the US Dollar (USD), reducing the appeal of Gold, a non-yielding asset.
Investors are now turning their attention to the US employment report. Consensus forecasts point to 85K Nonfarm Payrolls (NFP) added in May, down from 115K in April, while the Unemployment Rate is expected to remain unchanged at 4.3%. A stronger-than-expected report would likely support the US Dollar and increase pressure on Gold in the near term.
Despite the current pullback, the precious metal continues to find support from safe-haven demand in a fragile geopolitical environment. However, traders are likely to remain cautious ahead of the employment data release, which could become the main catalyst for Gold price action in the short 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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