Gold drifts lower to near $5,000 as Fed rate-cut hopes fade

Gold price edges lower to around $5,000 in Tuesday’s early Asian session.
Traders dialed back hopes that the Fed would reduce interest rates soon.
The Fed is widely expected to hold interest rates steady at current levels.

Lallalit Srijandorn FXStreet

Gold price (XAU/USD) trades with mild losses near $5,000 during the early Asian session on Tuesday. The precious metal extends the decline as hopes fade for the US Federal Reserve (Fed) to lower interest rates this year. All eyes will be on the Fed interest rate decision later on Wednesday.

Oil prices remained above $100 per barrel amid rising tensions in the Middle East as the US-Israeli war on Iran entered its third week. Fears that surging crude oil prices will lead to a rise in inflation have dampened expectations for interest rate cuts in the near term. This, in turn, could exert some selling pressure on a non-yielding asset.

"With higher oil prices comes higher inflation. If we do have higher inflation, central banks are not going to be as motivated as they were six months ago to cut rates, which is a negative for gold prices," said Bob Haberkorn, senior market strategist at RJO Futures.

The US central bank is widely expected to hold the benchmark federal funds rate steady at its current range of 3.50%–3.75% during its upcoming March meeting on Wednesday. Analysts believe that the Fed will reduce the rates again in 2026. However, the number and size of these rate cuts remain to be seen.

Traders in the fed funds futures market have taken even a September cut off the table and now see only one coming, in December, according to the CME FedWatch tool.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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

FXStreet

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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