- Gold prices are posting modest gains around $2,465 in early Asian trading on Wednesday.
- Rising tensions in the Middle East are boosting safe-haven demand, boosting gold.
- The US Consumer Price Index report for July will be the highlight of Wednesday.
Gold (XAU/USD) is trading with modest gains near $2,465 during the early Asian session on Wednesday. The yellow metal’s upside could be supported by safe-haven flows amid ongoing tensions in the Middle East. Traders will closely watch the release of the US Consumer Price Index (CPI) for July, due later on Wednesday.
Safe haven demand due to rising tensions in the Middle East could lift the precious metal in the short term. The BBC reported on Tuesday that the US has sent a guided missile submarine to the Middle East as tensions in the region rise. The move responds to fears of a wider regional conflict following the recent assassination of senior Hezbollah and Hamas leaders. Analysts at Saxo Bank A/S noted that gold remains “supported by geopolitical risks and anticipated Federal Reserve rate cuts amid rising tensions” involving Iran and Israel, as well as Ukraine.
On Tuesday, Atlanta Fed President Raphael Bostic said recent economic data made him “more confident” that the Fed can return inflation to its 2% target. Still, more evidence is needed before he is ready to support cutting interest rates.
Wednesday’s US CPI inflation report may offer some clues about the Federal Reserve’s (Fed) interest rate cut path. The CPI is expected to rise 0.2% on a monthly basis in July, compared with the previous month, which saw a 0.1% decline. On an annualized basis, CPI inflation is estimated to slow to 2.9% in July from 3.0% in June.
A softer reading could increase the likelihood of a Fed rate cut in September. On the other hand, a higher inflation reading could decrease the odds of an easing Fed policy, which is likely to put some selling pressure on non-yielding gold.
Gold FAQs
Gold has played a pivotal role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use for jewelry, the precious metal is considered a safe haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In order to support their currencies in turbulent times, central banks tend to diversify their reserves and buy gold to improve the perception of the strength of the economy and the currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasury bonds, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing 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 the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.
Gold prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, Gold prices tend to rise when interest rates fall, while rising money prices often weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep Gold prices in check, while a weaker Dollar is likely to push Gold prices higher.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
