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Gold declines below $4,050 as US PCE inflation supports Fed hike bets

  • Gold price edges lower to near $4,020 in Friday’s early Asian session. 
  • The annual core PCE reading rose at its highest level since 2023. 
  • A ship was hit by an unknown projectile in the Strait of Hormuz, undermining the rapid reopening of the energy chokepoint. 

Gold price (XAU/USD) declines to around $4,020 during the early Asian session on Friday. The precious metal extends the decline as traders have ramped up bets of a US rate hike. The Michigan Consumer Sentiment Index report is due later on Friday. Also, Federal Reserve (Fed) New York President John Williams and Fed Bank of Minneapolis President Neel Kashkari are set to speak. 

Data released by the US Bureau of Economic Analysis (BEA) on Thursday showed that the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s primary price gauge, rose 3.4% YoY in May, compared to 3.3% in April. The annual core PCE reading was the highest since October 2023.

Meanwhile, the headline PCE inflation climbed to 4.1% YoY in May from 3.8% in April. Both core and headline figures came in line with expectations. 

Markets continued to expect the US central bank to approve a rate hike in September, though they lowered odds slightly. It’s worth noting that Gold is often used as a hedge against inflation but does not yield interest, making it less attractive when interest rates are high.

Traders will closely monitor the Middle East developments. Bloomberg reported on Thursday that a ship was hit by an unknown projectile in the Strait of Hormuz, just hours after several freighters turned around while attempting to cross the vital waterway. Any signs of renewed tensions in the Middle East could raise concerns over elevated inflation, weighing on 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.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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