- Gold prices are weaker at around USD 2,430 in early Asian trading on Monday.
- Given increased geopolitical risks, inflows into safe havens could support the yellow metal.
- Traders are awaiting key US economic data this week as new sources of momentum, including producer price index (PPI), consumer price index (CPI) and retail sales.
Gold (XAU/USD) is trading lower at around $2,430 in the early Asian session on Monday. The modest recovery in the US dollar (USD) is dragging the yellow metal lower during the day. However, the downside could be limited given the increasing geopolitical tensions in the Middle East.
Tensions in the Middle East would keep the XAU/USD rate quoted as reports suggest the war is intensifying. On Sunday, Defense Secretary Yoav Gallant informed U.S. Defense Secretary Lloyd Austin that Iran’s military preparations indicated the country was preparing for a large-scale attack on Israel, according to Axios writer Barak Ravid on X, citing a person familiar with the call.
Increased volatility and heightened geopolitical risks are likely to boost safe-haven flows, benefiting the precious metal. “Over the medium term, the outlook for gold remains positive, with any declines due to underlying macroeconomic factors likely to be short-lived,” said Zain Vawda, market analyst at OANDA’s MarketPulse.
Investors are divided on whether the US Federal Reserve (Fed) would be aggressive in its monetary policy and announce a 50 or 25 basis point rate cut. This week’s key US economic data could provide some clues about the economic situation with the release of the US Producer Price Index (PPI), Consumer Price Index (CPI) and Retail Sales. The stronger-than-expected data could delay or reduce the likelihood of deeper Fed rate cuts that weigh on gold prices.
Frequently asked questions about gold
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. Aside from its shine and use as a piece of jewelry, the precious metal is currently widely viewed as a safe haven asset, meaning it is considered a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency devaluation as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In their efforts to support their currencies during turbulent times, central banks tend to diversify their reserves and buy gold to improve the perceived strength of the economy and currency. High gold reserves can be a source of confidence in a country’s ability to pay. According to the World Gold Council, in 2022 central banks added 1,136 tonnes of gold worth around $70 billion to their reserves. This is the highest annual purchase on record. Central banks from emerging markets such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the U.S. dollar and U.S. Treasuries, both of which are important reserves and safe haven assets. When the dollar depreciates, the price of gold tends to rise, allowing investors and central banks to diversify their investments during turbulent times. Gold also has an inverse correlation with risky assets. A rally in the stock market tends to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.
The price can change based on a variety of factors. Geopolitical instability or fear of a severe recession can quickly drive up the price of gold due to its safe-haven status. As a non-yielding asset, gold tends to rise when interest rates are lower, while higher money costs usually weigh on the yellow metal. However, most of the moves depend on how the US dollar (USD) behaves, as the asset is priced in dollars (XAU/USD). A strong dollar tends to keep gold prices in check, while a weaker dollar is likely to drive gold prices higher.
