Gold Price Forecast: XAU/USD drifts lower below $2,700 on firmer US Dollar

Gold price loses ground to around $2,680 in Monday’s early Asian session.
The strength of the USD undermines the yellow metal.
The uncertainty surrounding global economic uncertainty, geopolitical risks might boost safe-haven flows, benefiting the Gold price.

Lallalit Srijandorn FXStreet

Gold price (XAU/USD) trades in negative territory near $2,680 during the early Asian session on Monday. The downtick of the precious metal is pressured by a stronger US Dollar (USD) due to Donald Trump's victory.

Meanwhile, the US Dollar Index (DXY), an index of the value of the USD measured against a basket of six world currencies, extends its upside to around 105.00, the four-month high.

Trump's victory has fuelled questions about whether the US Federal Reserve (Fed) may proceed to cut rates at a slower and smaller pace. This, in turn, boosts the Greenback and weighs on the USD-denominated Gold price.

“This rally in the dollar and yields has put pressure on gold, which traditionally falls as real interest rates rise, reflecting reduced demand for safe-haven assets in the short term,” noted Matthew Jones, precious metals analyst at London-based metals trader Solomon Global. “However, from a longer-term, macro perspective, the future is ‘as good as gold,” added Jones.

The upbeat US economic data on Friday contributes to the USD’s upside. The US Consumer Sentiment Index rose to 73.0 in November from 70.5 in October, according to the preliminary reading by the University of Michigan. This figure came in better than the market expectation of 71.0.

On the other hand, the global economic uncertainty and the ongoing geopolitical tensions in the Middle East might help limit the yellow metal’s losses. Israeli army Chief of Staff Herzi Halevi approved the expansion of the ground invasion of southern Lebanon, state broadcaster Kan reports.

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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