The price of gold (XAU/USD) falls to near $4,535, snapping a two-day winning streak in Monday’s early Asian session. The precious metal is losing value amid a lack of progress in peace negotiations between the US and Iran. Traders will be closely monitoring developments in the Middle East amid continuing tensions in the region.
On Sunday, Reuters reported that Iranian officials say talks with the US are continuing but no nuclear commitments have been made. Meanwhile, Iran’s parliament speaker and chief negotiator Mohammad Bagher Ghalibaf said Tehran would not accept any agreement with Washington unless it “secured the rights of the Iranian people.”
As diplomatic exchanges continued, Israel expanded its ground attack in Lebanon, destroying a frail truce with its northern neighbor.
Federal Reserve (Fed) policymakers continued to signal on Friday that the central bank may be forced to raise interest rates in the future if the war in the Middle East leads to a sustained augment in already high inflation. It is worth noting that gold is often used in the face of geopolitical uncertainty, but does not earn interest, making it less attractive when interest rates are high.
Traders are waiting for Friday’s US employment data, which will receive a novel impulse. This report may give some clues as to whether the U.S. economy is sturdy enough to prompt the Fed to raise interest rates by next year.
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 exploit 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 sheltered 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 sturdy dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
