The price of gold (XAU/USD) is attracting some buyers to around $4,110 during the early Asian session on Thursday. The precious metal is gaining momentum amid cautious mood and uncertainty about the US economy. Traders will be closely monitoring the September US Non-Farm Payrolls (NFP) report later on Thursday.
Growing economic uncertainty, including delays in key jobs reports due to the recent government shutdown, has complicated the Federal Reserve’s assessment of the labor market. This in turn boosts safe haven assets such as gold. All eyes will be on the delayed September jobs report, which could provide insight into the health of the US labor market and provide further clues on the path of US interest rates.
A weaker than expected report could increase the likelihood of a rate cut in December and lift the yellow metal. Lower interest rates can reduce the opportunity cost of holding gold, supporting the non-yielding precious metal.
On the other hand, declining expectations of an interest rate cut by the Federal Reserve next month may exert some selling pressure on non-yielding gold. Minutes from the October 28-29 Federal Open Market Committee (FOMC) meeting showed Fed officials divided and cautious about the future path of interest rates.
While the committee decided to cut the interest rate by 25 basis points, it was a divided decision, with some members favoring another cut at the December meeting. Markets now expect about a 30% chance of a Fed rate cut next month, down from about 60% last week, according to the CME FedWatch tool.
Frequently asked questions about gold
Gold has played a major role in human history as it has been widely used as a store of value and a medium of exchange. Currently, apart from its luster and use in jewellery, the precious metal is widely viewed as a safe haven asset, meaning it is a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency depreciation because it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve assets and safe havens. When the value of the dollar declines, 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 rise in the stock market tends to weaken the price of gold, while a sell-off in riskier markets tends to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession could cause the price of gold to rise rapidly due to its safe-haven status. As a lower-yielding asset, gold tends to rise as interest rates fall, while a higher cost of money usually negatively impacts the yellow metal. However, most of the moves depend on how the US Dollar (USD) behaves as the asset is priced in Dollars (XAU/USD). A stronger dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.
