The price of gold (XAU/USD) rose to nearly $4,775 in early Asian trading on Wednesday. The precious metal extends its rally and is poised for another record high in times of political and economic uncertainty. US President Donald Trump’s speech at the World Economic Forum in Davos, Switzerland, will take center stage later Wednesday.
Traders continue to stockpile safe and sound assets amid tensions between the United States and Europe over Greenland. US President Donald Trump over the weekend threatened to impose tariffs on eight European countries that oppose his plans to take control of Greenland.
On Wednesday, the BBC reported that the European Parliament plans to suspend approval of the US trade deal agreed in July, according to sources close to the International Trade Committee. The suspension is expected to be announced on Wednesday in Strasbourg, France. Escalating tensions between the US and Europe may strengthen time-honored safe and sound assets such as gold in the near future.
Traders are reversing their bet that the US Federal Reserve (Fed) will cut interest rates later this month following signs of improvement in the US labor market. Traders are currently pricing in another rate cut in June, a month after Fed Chairman Jerome Powell’s term ends, followed by another easing of interest rates in the fourth quarter. The notion that the U.S. central bank can keep interest rates higher for an extended period of time generally underpins the U.S. dollar (USD) and negatively affects non-interest-bearing assets such as gold.
Gold FAQs
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Nowadays, beyond its luster and employ in jewelry, the precious metal is widely viewed as a safe-haven asset, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation because it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in turbulent times, central banks typically diversify their reserves and purchase gold to improve the perceived strength of the economy and currency. High gold reserves may provide a source of confidence in the country’s solvency. According to data from the World Gold Council, central banks added 1,136 tons of gold to their reserves in 2022, worth about $70 billion. This is the highest annual purchase since registration began. 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 both major reserve assets and safe and sound haven assets. When the dollar depreciates, gold tends to rise, allowing investors and central banks to diversify their holdings in turbulent times. Gold is also inversely correlated with risky assets. A rally in the stock market tends to weaken the price of gold, while sell-offs in riskier markets support the precious metal.
The price may change due to many factors. Geopolitical instability or fear of a deep recession can quickly cause gold prices to rise due to its safe-haven status. Gold, as a non-yielding asset, tends to rise at lower interest rates, while the higher cost of money tends to weigh on the yellow metal. Still, most of the movements depend on the behavior of the US dollar (USD) when the asset is priced in dollars (XAU/USD). A sturdy dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
