Gold declines to near $4,000 as inflation concerns reinforce higher-rate outlook
- Gold price edges lower to near $4,015 in Tuesday’s early Asian session.
- Fears of inflation have boosted expectations of higher interest rates.
- Traders brace for the US ADP employment data on Wednesday ahead of the highly-anticipated NFP report.
Gold price (XAU/USD) declines to around $4,015 during the early Asian session on Tuesday. The precious metal extends its downside as inflationary pressure raised expectations that central banks would keep interest rates higher for longer.
CNBC reported on Monday that the United States and Iran are set to hold fresh talks on Tuesday in Doha, Qatar, following a weekend of hostilities in the Middle East. However, uncertainty remain high and there was no response from Iran’s Ministry of Foreign Affairs.
“The market is attuned to Middle East headlines, (with) some uptick in tensions over the weekend and still adjusting to a more hawkish Fed tilt,” said Peter Grant, vice president and senior metals strategist at Zaner Metals.
The US Federal Reserve (Fed) decided to hold interest rates steady at its June policy meeting, but policymakers expect a rate hike later this year amid growing concerns about inflation lodged above the US central bank’s 2% target. 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.
Traders await the US ADP employment data on Wednesday and the US Nonfarm Payrolls (NFP) report on Thursday for further clues on the Fed’s monetary policy stance. If the employment data show a stronger-than-expected outcome, this could support the higher-for-longer Fed stance and weigh on the yellow metal. On the other hand, any signs of weakening in the US labor market could drag the US Dollar (USD) and underpin the USD-denominated commodity price 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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