The price of gold (XAU/USD) rose to around $4,600 during the early Asian session on Wednesday. The precious metal is gaining momentum as traders boost their bets on US interest rate cuts following the release of inflation data. Traders will benefit from US retail sales and producer price index (PPI) data later today.
The latest US Consumer Price Index (CPI) inflation report provides some support to the yellow metal as the core CPI fell below analysts’ expectations, increasing the chances of the US Federal Reserve continuing to cut interest rates this year. Lower interest rates can reduce the opportunity cost of holding gold, supporting the non-yielding precious metal.
In addition, uncertainty surrounds the US central bank amid renewed threats from the administration of US President Donald Trump. Security forces in the Islamic Republic suppressed large-scale demonstrations, with hundreds of people reportedly killed.
The government has cut off internet access in Iran, making it difficult to verify how the situation is developing on the ground. Trump has repeatedly threatened to intervene if the government kills protesters.
US retail sales and producer price index data will take center stage on Wednesday. These reports may provide some hints about the path of US interest rates. Any signs of hotter US inflation could strengthen the US dollar and impact US dollar-denominated commodity prices in the near term.
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.
