Gold price (XAU/USD) is trading in negative territory near $4,210 during the early Asian session on Wednesday. The precious metal fell as traders expect the Federal Open Market Committee (FOMC) to take a hawkish approach toward future easing of monetary policy at its next policy meeting on Wednesday.
The Federal Reserve (Fed) is likely to make its third straight rate cut on Wednesday, which will lower the federal funds rate to a target range of 3.50% to 3.75%. Fed funds futures traders now expect a roughly 90% chance of a rate cut at the December meeting, up from a 71% chance earlier this month, according to the CME FedWatch tool.
However, analysts believe that Fed Chairman Jerome Powell’s press conference is likely to indicate an upper limit for future interest rate cuts, and perhaps indicate a pause after the move. The US central bank’s “tightening” may affect the non-yielding yellow metal in the near term.
“The most likely outcome is some kind of hawkish tapering where they cut, but the statement and press conference suggest they may be done tapering for now,” said Bill English, a former director of monetary affairs at the Federal Reserve who is now a professor at Yale University.
On the other hand, the demand for gold by major central banks may support the upside. The People’s Bank of China (PBoC) added to its gold reserves for the 13th consecutive month, official data showed on Sunday. Bullion held by China’s central bank rose by 30,000 troy ounces last month, bringing the total to about 74.12 million troy ounces.
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.
