Gold Price Forecast: XAU/USD falls to near $3,950 on US-China trade optimism

Gold price slumps to around $3,950 in Wednesday’s early Asian session.
Trump said he expects the trade deal with China done this week.
The Fed is set to cut its benchmark rate by 25 bps on Wednesday.

Lallalit Srijandorn FXStreet

Gold price (XAU/USD) tumbles to a three-week low near $3,950 during the early Asian session on Wednesday. The precious metal extends its downside as hopes for progress in US–China trade talks dimmed its safe-haven allure. Traders will keep an eye on the Federal Reserve's (Fed) interest rate decision later on Wednesday.

The Gold price retreats from its record high, with profit-taking weighing on the yellow metal after strong gains in recent months. Signs of a thaw in US-China trade tensions and cooling geopolitical tensions reduce the demand for safe-haven assets such as Gold.

US President Donald Trump said that he expected to reach a trade agreement with China in the coming days. US and Chinese officials stated on Sunday that they'd reached an initial consensus for Trump and Chinese leader Xi Jinping to try to finalize during a high-stakes meeting later on Thursday.

“The U.S.-China trade tensions have really diminished, with a possible trade deal later this week after a summit meeting between Presidents Xi and Trump. That's bearish for the safe-haven metals," said Jim Wyckoff, senior analyst at Kitco Metals.

On the other hand, the rising bets of a Fed rate cut might cap the downside for the precious metal. The US central bank is widely expected to cut its benchmark interest rate by 25 basis points (bps) at the conclusion of its October meeting on Wednesday. This would bring the Federal Funds Rate target to 3.75%-4.00%.

Markets are now pricing in nearly a 100% possibility of a 25 bps reduction, according to the CME FedWatch tool. This would be the second consecutive rate cut, following the September policy meeting. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.

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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