Gold Price Forecast: XAU/USD edges lower below $3,650 on stronger US Dollar, profit-taking

The Gold price drifts lower to around $3,640 in Friday’s early Asian session.
Fed decided to cut rates by 25 bps while signaling two more reductions this year.
Rising geopolitical tensions in the Middle East could boost the safe-haven flows, supporting the Gold price.

Lallalit Srijandorn FXStreet

The Gold price (XAU/USD) trades in negative territory for the second consecutive day near $3,640 during the early Asian session on Friday. The precious metal edges lower after reaching a record high in the previous session due to some profit-taking and a firmer US Dollar (USD).

On Wednesday, the US Federal Reserve (Fed) cut the interest rates by 25 basis points (bps) and signaled two more reductions by the end of this year. This is the Fed's first reduction this year and puts the target range for its main lending rate at 4.0% - 4.25%.

Fed Chair Jerome Powell indicated that the latest move to lower interest rates was a risk management cut and added that he doesn't feel the need to move quickly on rates. A less dovish stance from the US central bank provides some support to the Greenback and weighs on the USD-denominated commodity price in the near term.

"Investors judged the Fed's guidance less dovish than anticipated," said MUFG analyst Soojin Kim. "Chair Powell highlighted tariff-driven inflation risks and stressed a 'meeting-by-meeting' approach to further cuts, sending the dollar higher," Kim added.

On the other hand, escalating geopolitical tensions in the Middle East could boost the yellow metal, a traditional safe-haven asset. Israeli media reports indicated the military is preparing for a major ground incursion into Gaza City. For weeks, Israel has been laying the groundwork for such an operation, urging civilians to evacuate to designated humanitarian areas like Al-Mawasi.

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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