The price of gold (XAU/USD) falls to around $4,100 in the early Asian session on Wednesday. The precious metal came under modern selling pressure after the United States declared a response to Iran over reports of attacks on three oil tankers in and around the Strait of Hormuz. Traders are awaiting the release of the Federal Reserve’s (Fed) June meeting a few minutes later on Wednesday.
“U.S. Central Command forces have launched a series of massive strikes against Iran to impose high costs for targeting and attacking commercial vessels crewed by innocent civilians in an international waterway,” Centcom said Tuesday.
The U.S. military added that the strikes were in response to Iranian attacks on three merchant ships passing through the Strait of Hormuz.
Renewed tensions threaten to further destabilize relations between Washington and Tehran after the two countries signed an interim peace agreement last month that ended fighting on all fronts and reopened the strait. This, in turn, could escalate concerns about energy-driven inflation and negatively impact the unprofitable bullion.
A disappointing June U.S. nonfarm payrolls (NFP) report prompted traders to limit bets from the Federal Reserve (Fed) on an interest rate hike, which could facilitate limit losses for the unprofitable metal. Last week’s data showed the U.S. economy added 57,000 jobs in June, less than the downwardly revised 129,000 added in May and less than market expectations of 110,000.
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 secure 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 robust dollar tends to keep the gold price in check, while a weaker dollar will likely cause gold prices to rise.
