The gold price (XAU/USD) is gaining strength to around $4,125 during Friday’s early Asian session. The precious metal is extending its rally after weaker-than-expected U.S. nonfarm payrolls (NFP) data reduced expectations for Federal Reserve (Fed) interest rate increases this year.
Data released Thursday by the U.S. Bureau of Labor Statistics (BLS) showed the U.S. economy added 57,000 jobs in June, below the market consensus of 110,000. Meanwhile, the unemployment rate fell to 4.2% over the same period, down from 4.3% in May. That followed Wednesday’s report showing U.S. private-sector payrolls rose less than expected in June.
“Lower than expected job numbers mean there is less likelihood of potential interest rate increases later this year. As we know, gold tends to outperform in a lower interest rate environment,” said David Meger, director of metals trading at High Ridge Futures. “Therefore, we have seen significant growth in the gold market in connection with this,” he added.
Reuters reported that the United States and Iran concluded a round of indirect talks on Wednesday with no signs that they had made progress toward lasting peace. Uncertainty or signs of prolonged conflict in the Middle East could raise inflation concerns, prompting traders to enhance their bets on interest rate hikes and consider underperforming 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 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 robust dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
