Gold price (XAU/USD) recovers some lost ground to around $4,345 during the early Asian session on Monday. However, the potential upside for the precious metal might be limited amid ongoing tensions in the Middle East and expectations that the Federal Reserve (Fed) will keep interest rates unchanged.
Reuters reported on Sunday that the Israeli military said that it intercepted waves of missiles fired from Iran for the first time since early April. Iranian officials said that any attack from Israel against Lebanon or Iran would be met with a “crushing and comprehensive response.”
US President Donald Trump said that he would call Israeli Prime Minister Benjamin Netanyahu and ask him not to retaliate. Trump further stated that Netanyahu will have ‘no choice’ but to accept a deal with Iran, adding that Iran’s strikes have not changed his desire to conclude US-Iran negotiations.
Escalating tensions in the Middle East continue to fuel concerns over inflation and expectations of elevated interest rates, which weigh on the Gold price, a non-yielding asset.
Data released by the US Bureau of Labor Statistics (BLS) on Friday showed that the Nonfarm Payrolls (NFP) in the United States (US) rose by 172K in May, versus the 179K increase (revised from 115K). This figure came in stronger than the market expectation of 85K by a wide margin.
Meanwhile, the Unemployment Rate remained unchanged at 4.3% in May, in line with the market consensus. The upbeat US jobs report has forced traders to completely price out near-term interest rate cuts, which undermines the yellow metal.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
