Gold rebounds above $4,550 on weaker US Dollar
- Gold price rebounds to near $4,565 in Tuesday’s early Asian session.
- The US Dollar Index drops to its session lows, which supports the USD-denominated commodity price.
- Traders have largely priced out US interest rate cuts this year, while expectations for a hike have risen.
Gold price (XAU/USD) recovers some lost ground from a one-and-a-half-month low to around $4,565 during the early Asian session on Tuesday. The precious metal edges higher amid a weaker US Dollar (USD). However, the potential upside might be limited as the Iran war fueled inflation concerns and expectations of tighter monetary policy.
The USD declines against most major currencies as traders evaluate whether progress in ending the Iran war is likely in the near term. "The U.S. dollar index dropped to its session lows - that's a friendly element for the gold market," said Jim Wyckoff, market analyst at American Gold Exchange.
On the other hand, higher energy prices driven by the Iran war stoked inflation fears and reinforced expectations of US Federal Reserve (Fed) rate hikes. It’s worth noting that Gold is often used amid geopolitical uncertainty but does not yield interest, making it less attractive when interest rates are high.
Traders are pricing in a 35.0% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.
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.