The price of gold (XAU/USD) rose to nearly $4,615 and is set to retest its record high during the early Asian session on Thursday. The precious metal extends its uptrend as traders flock to safe havens amid geopolitical and economic uncertainty. Traders are preparing for the US weekly initial jobless claims report, which will be released later on Thursday.
Tensions have risen in Iran after US President Donald Trump threatened action over the violent crackdown on protesters, with the US transferring military personnel and the Iranian government warning neighboring countries not to assist in the attack.
On Tuesday, Trump canceled all his meetings with Iranian officials and promised the demonstrators that help was on the way, without specifying what that meant. Such developments tend to boost demand for gold as a traditional safe-haven asset, as investors look for protection against potential conflict escalation.
Moreover, concerns about the independence of the Federal Reserve may contribute to the bullish trend for the yellow metal. The Federal Reserve has received subpoenas from the Justice Department over statements it made to Congress last summer regarding cost overruns for a $2.5 billion building renovation project at the central bank’s headquarters in Washington, Federal Reserve Chairman Jerome Powell said Sunday. Powell described the threats as a “pretext” to pressure the US central bank to lower interest rates.
On the other hand, growing expectations that the US central bank will keep interest rates unchanged over the next few months may impact the non-yielding precious metal. The US Bureau of Labor Statistics (BLS) revealed last week that the US unemployment rate fell to 4.4% in December. In addition, data released on Wednesday showed that US producer prices rose slightly in November, while US retail sales rose more than expected during the same period.
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.
