Gold holds losses near $4,000 due to Middle East tensions, Fed rate uncertainty
- Gold struggles as oil rebounds after US intercepts Iranian missiles, renewing Middle East geopolitical tensions and inflation concerns.
- Unusually high market uncertainty surrounds the Fed’s rate decision, with some pricing in further hikes.
- Traders factor in a 76.6% chance of a September rate increase, keeping borrowing costs elevated.
Gold price (XAU/USD) remains subdued for the second successive day, trading around $4,020 per troy ounce during the Asian hours on Wednesday. Gold loses ground as oil prices rebounded following renewed hostilities in the Middle East, reviving geopolitical tensions and keeping investors focused on inflationary pressures and the interest rate outlook.
The escalation stems from an Iranian attack targeting US troops stationed across the region, with Iran firing multiple ballistic missiles toward a US base in Jordan around 5:45 pm ET. According to statements and video footage released by the US military, all of the surprise IRGC missiles were successfully intercepted. The strike is widely believed to be a direct response to recent US actions targeting Iranian navy boats.
Meanwhile, investors are closely monitoring the Federal Reserve’s (Fed) upcoming policy decision, where the central bank is widely expected to leave interest rates unchanged. Despite repeated calls from US President Donald Trump for lower interest rates, market sentiment remains cautious; traders are currently pricing in a 30.5% chance of an immediate rate hike, an unusually high level of uncertainty so close to a policy announcement. Looking further ahead, markets are also factoring in a 76.6% probability of a rate increase in September, reinforcing expectations that borrowing costs could remain elevated for longer.
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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