- Gold price is trading in positive territory near $2,580 in early Asian session on Monday.
- Expectations of a Fed rate cut and persistent geopolitical risks continue to support gold prices.
- Slow momentum in Chinese economic activity could weigh on the precious metal.
Gold (XAU/USD) price is gaining momentum around $2,580 during the early Asian session on Monday. The precious metal hit a fresh all-time high of $2,586 on Friday amid rising expectations of a significant rate cut by the Federal Reserve (Fed). Wednesday’s Federal Open Market Committee (FOMC) meeting will be in focus.
Mounting speculation of a rate cut by the Fed after US economic data signalled a slowdown in the economy has boosted the yellow metal as lower interest rates reduce the opportunity cost of holding non-yielding gold. Financial markets now price in a 48% chance of a 25 basis points (bps) rate cut at its next meeting on September 17-18, while the odds of a 50 bps cut stand at 52%, according to the CME’s FedWatch tool.
“We’re heading into a lower interest rate environment, so gold is becoming much more attractive… I think we could see much more frequent cuts rather than a larger magnitude,” said Alex Ebkarian, chief operating officer of Allegiance Gold.
Furthermore, ongoing geopolitical tensions in the Middle East provide further support to the safe-haven price of gold. Israeli Prime Minister Benjamin Netanyahu said on Sunday that Yemen’s Houthis will pay a “heavy price” after a missile fired by the group landed in central Israel, according to the BBC.
However, the sluggish economy and concerns about an economic slowdown in China could limit the upside of precious metals, as China is the world’s largest producer and consumer. Chinese retail sales and industrial production were weaker than expected in August. Industrial production grew at the slowest pace since March, while retail sales had their second slowest month of the year.
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 their aim 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.
