The price of gold (XAU/USD) is attracting some sellers to around $4,720 during the early Asian session on Wednesday. The price of the precious metal falls as renewed disruption in the Strait of Hormuz increases inflation concerns.
On Wednesday, Bloomberg reported that US President Donald Trump would extend the ceasefire with Iran until progress is made in talks between the two countries. Trump’s statement set a markedly different tone than earlier in the day, when he said, “I expect bombings” if Iran did not meet his terms and added that the military was “willing to go.”
Rising energy costs are stoking inflation fears, raising the bar for interest rate cuts. Gold is often used in times of geopolitical uncertainty, but it does not earn interest, making it less attractive when interest rates are high.
However, worse-than-expected US retail sales data may push up the US dollar (USD) and impact the price of USD-denominated goods. Data released Tuesday by the U.S. Census Bureau showed that retail sales in the United States (US) rose 1.7% m/m in March, compared to a 0.7% escalate (adjusted from 0.6%) recorded in February. This result was better than the market consensus of 1.4%. On a year-over-year basis, retail sales increased by 4.0% in March, matching February’s result.
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 operate 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 protected 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 favor 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 mighty dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
