Gold rebounds above $4,100 as buyers return
- Gold price gains momentum to near $4,125 in Thursday’s early Asian session.
- Buyers stepped into the safe-haven Gold, while continuing to assess the Middle East conflict.
- Money markets are now pricing in a 34% chance of a rate hike from the Fed at its July policy meeting.
Gold price (XAU/USD) trades in positive territory around $4,125 during the early Asian session on Thursday. The precious metal extends its recovery as ongoing geopolitical uncertainties continue to underpin safe-haven demand.
Traders are scrambling back into the yellow metal after attacks between the United States (US) and Iran are widening into a second week. US President Donald Trump on Wednesday vowed that the US will blow up an Iranian bridge or power plant, including those in the country’s capital city of Tehran every time Iran shoots at a ship in the Strait of Hormuz.
Meanwhile, Iran threatened to strike US-linked infrastructure and energy facilities across the region if Washington carries out Trump’s threat. Earlier Wednesday, US Secretary of State Marco Rubio accused Iran of not being “serious” about making an agreement with the US while emphasizing that Washington was “committed to diplomacy” in the Middle East.
“The recent rebound feels mostly flow-driven, sparked by a bit of dip-buying and sheer relief that the US$4,000-an-ounce floor held,” says Ryan McKay, senior commodity strategist at TD Securities. “However, I don’t expect this to be the start of a new structural trend. Energy prices are just starting to pick up again, and that concern will ultimately cap the upside,” McKay added.
Fed funds futures traders were pricing in a nearly 34% probability of a rate hike from the Fed this month, up from 10% a week ago. Traders were also pricing in a 78% odds of at least a 25 basis points (bps) rate increase in September, according to the CME FedWatch tool.
Gold FAQs
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.
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.
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.
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.
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