The price of gold (XAU/USD) rose to a new all-time high near $4,555 during the early Asian session on Monday. The precious metal continues its upward trend amid safe-haven demand and expectations of a cut in US interest rates. Traders will benefit from further signals from the release of US CPI inflation data later on Tuesday.
US President Donald Trump is considering a series of potential military options in Iran following deadly protests in the country, CNN reported on Sunday. The sources said that Trump is considering implementing his recent threats to strike the Iranian regime if it uses lethal force against civilians.
Furthermore, the UK and Germany are discussing plans to increase their military presence in Greenland to show that the continent is serious about Arctic security. This action came after US forces arrested former President Nicolas Maduro last week. Uncertainty and geopolitical risks around the world have boosted traditional safe-haven assets such as gold.
A mixed US jobs report added to expectations of a rate cut from the US Federal Reserve, providing some support to the yellow metal. Lower interest rates can reduce the opportunity cost of holding gold, supporting the non-yielding precious metal.
US nonfarm payrolls (NFP) rose by 50,000 in December, according to the US Bureau of Labor Statistics (BLS) on Friday. This reading came after November’s reading of 56,000 (revised from 64,000) and came in below the market consensus of 60,000. The unemployment rate fell to 4.4% in December from 4.6% in November.
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.
