Gold price (XAU/USD) rises to around $4,050 during the early Asian session on Wednesday. The precious metal rebounds as softer-than-expected US inflation data boosted hopes of the US Federal Reserve (Fed) adopting a less hawkish stance.
Data released by the US Bureau of Labor Statistics (BLS) on Tuesday showed that the US Consumer Price Index (CPI) inflation eased to 3.5% YoY in June from the three-year high it set at 4.2% in May. This figure came in below the market consensus of 3.8%. On a monthly basis, the headline CPI declined by 0.4% in June, versus a rise of 0.5% in May.
The core CPI, which excludes volatile food and energy prices, was unchanged on a monthly basis, and it was up 2.6% on a yearly basis, compared to the 2.9% increase seen in May and the market expectation of 2.8%. After the softer inflation data, traders exited bets that the Fed would hike rates at its July 28-29 meeting, supporting the yellow metal.
“Gold gallops higher on a surprisingly subdued CPI report that saw headline dive lower but more importantly, core unchanged versus 0.2%. This should drop rate hike expectations sharply at least for the July and September meetings,” said Tai Wong, an independent metals trader.
Nonetheless, oil-driven inflation concerns could prompt the US central banks to keep interest rates elevated for longer, weighing on non-yielding assets such as gold. US Central Command (CENTCOM) forces said it has “begun launching an additional round of strikes against Iran to continue degrading Iranian capabilities used to attack commercial shipping in the Strait of Hormuz.”
Iran’s Foreign Ministry spokesperson, Esmaeil Baghaei, stated that the US military’s attack on a ranger post in Hormozgan is “the latest example of America’s heinous war crimes.”
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.