Gold declines to near $4,500 as renewed US‑Iran tensions, Fed tightening bets weigh

• Gold price edges lower to near $4,500 in Wednesday’s early Asian session. 
• Uncertainty over the US-Iran peace deal and the vital Strait of Hormuz weighs on the Gold price. 
• Markets currently expect a 25-basis-point Fed rate hike in December.

Gold price (XAU/USD) loses ground to around $4,500 during the early Asian session on Wednesday. The precious metal extends the decline as fresh US military strikes on Iran dimmed hopes of a peace deal and reinforced concerns that persistent inflation could keep interest rates higher for longer. 

Security in the Strait of Hormuz remained unclear after the US and Iran exchanged strikes on Tuesday, and US Central Command pushed back on reports that suggested the military was helping escort vessels.

The renewed clashes occurred just hours after US President Donald Trump said negotiations with Tehran to extend their ceasefire and reopen the crucial waterway are proceeding.  

“While hope of a US-Iran deal has offered some support, the situation remains fragile and persistent, as inflation fears continue to loom over precious metals,” said Ryan McKay, senior commodity strategist at TD Securities. 

Kevin Warsh was sworn in as US Federal Reserve (Fed) chairman on Friday. He took over the leadership of the US central bank amid growing expectations of tighter global monetary policy. It’s worth noting that Gold is often used amid geopolitical uncertainty but does not yield interest, making it less attractive when interest rates are high.

Traders are now pricing in a 39.0% chance that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, 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 rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.