The gold price (XAU/USD) is fluctuating slightly after opening on a downside gap and is hovering around $4,670 per troy ounce during Monday trading hours in Asia. The unprofitable metal is struggling as rising energy prices enhance the risk of inflation, reducing expectations for interest rate cuts by the US Federal Reserve (Fed) and other major central banks.
The West Texas Intermediate (WTI) crude oil price started the week on a bullish gap, rising about 8.5% and was trading at about $98.00 per barrel at the time of writing. The recent enhance in oil prices is mainly due to the renewed escalation of the conflict between the United States (US) and Iran.
US President Donald Trump said Washington would begin blocking all ships entering or leaving the Strait of Hormuz after announcing the failure of US-Iran peace talks in Islamabad. Moreover, US Central Command (CENTCOM) said the forces would begin blocking all maritime traffic entering and leaving Iranian ports on Monday at 10:00 a.m. ET (2:00 p.m. GMT).
Friday’s sizzling data on the U.S. Consumer Price Index (CPI) strengthened the Fed’s stance on growth for the long haul. The U.S. Bureau of Labor Statistics (BLS) reported that annual CPI rose to 3.3% in March from 2.4% in February, which was in line with expectations. On a monthly basis, CPI increased by 0.9% after 0.3% previously. Meanwhile, core CPI increased by 0.2% month-on-month and 2.6% year-on-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 apply 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 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. Despite this, most of the movements depend on the behavior of the US dollar (USD) when the asset is priced in dollars (XAU/USD). A forceful dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
