Gold prices (XAU/USD) climbs to a record high near $2,390 during the early Asian session on Friday.
The market expectation that the US Federal Reserve (Fed) will cut its benchmark interest rate this year is the main driver for the yellow metal. Additionally, the gold purchase by the Chinese central bank and the ongoing geopolitical tensions in the Middle East boost safe-haven flows, benefiting the gold price.
Analysts believe the US Fed to maintain its projection of three 25-basis points (bps) rate cuts this year despite concerns over recent higher-than-expected inflation reports.
The People's Bank of China (PBoC) purchased gold for the 17th consecutive month in March, adding 160,000 ounces to its reserves of 72.74 million troy ounces, per Reuters. Chinese investors have shifted to gold as an alternative asset despite deteriorates in the property sector and equities prices in recent years.
Furthermore, the rising geopolitical risks also boost safe-haven assets like gold price. According to the US and its allies, there is a higher possibility of drone or missile strikes by Iran or any of its proxy groups on government and military infrastructure targets in Israel.
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.
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