Gold price (XAU/USD) is trading in positive territory near $4,230 during early Asian trading hours on Monday. The precious metal rose amid growing speculation that the US Federal Reserve may cut interest rates in December. Traders await the release of the US ISM Manufacturing Purchasing Managers’ Index (PMI) report for November later on Monday.
Expectations of continued monetary policy easing by the Federal Reserve were the main driver for the yellow metal’s price. Traders are increasing their bets on a rate cut in December following recent weak US economic data and dovish comments from Federal Reserve policymakers. According to the CME FedWatch tool, financial markets now estimate a roughly 87% probability of a rate cut at the conclusion of the Fed’s Dec. 9-10 meeting, up from a 71% probability a week ago. Lower interest rates can reduce the opportunity cost of holding gold, supporting the non-yielding precious metal.
The US ISM Manufacturing PMI will be published later today, which is expected to ease slightly to 48.6 in November from 48.7 in October. In the event of a stronger than expected result, this could push the US dollar higher and affect the prices of US dollar-denominated commodities in the near term.
Optimism surrounding peace talks between the United States and Ukraine could reduce gold’s appeal as a safe-haven asset. US Secretary of State Marco Rubio said the meeting between US and Ukrainian officials was “very productive,” but there is still more work to be done to end Russia’s war in Ukraine, The Guardian reported on Sunday. US President Donald Trump’s special envoy, Steve Witkoff, will travel to Moscow to meet Vladimir Putin later this week.
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.
