Gold price (XAU/USD) gains momentum around $2,580 during the early Asian session on Monday. The precious metal reached a fresh all-time high at $2,586 on Friday amid rising expectations of a significant Federal Reserve (Fed) rate cut. The Federal Open Market Committee (FOMC) meeting on Wednesday will be in the spotlight.
The growing speculation of an interest rate cut by the Fed after US economic data signaled a slowing of the economy has boosted the yellow metal as lower interest rates reduce the opportunity cost of holding non-yielding Gold. Financial markets are now pricing in a 48% chance of a 25 basis points (bps ) US rate cut at its upcoming meeting on September 17-18, while the odds of a 50 bps cut stand at 52%, according to the CME FedWatch tool.
“We are headed towards a lower interest rate environment, so gold is becoming a lot more attractive… I think we could potentially have a lot more frequent cuts as opposed to a bigger magnitude,” said Alex Ebkarian, chief operating officer at Allegiance Gold.
Additionally, the ongoing geopolitical tensions in the Middle East provide further support to the safe-haven Gold price. Israeli Prime Minister Benjamin Netanyahu said on Sunday that Yemen's Houthis will pay a "heavy price" after a missile fired by the group landed in central Israel, per the BBC.
Nonetheless, the sluggish economy and the concerns about the economic slowdown in China might cap the upside for precious metals as China is the world's biggest producer and consumer. The Chinese Retail Sales and Industrial Production were weaker than the expectation in August. Industrial output grew at the slowest pace since March, while Retail Sales had their second-slowest month of the year.
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.