Gold Price Forecast: XAU/USD flat lines above $2,500 amid weaker US Dollar, Fed rate cut expectations

Gold price holds steady near $2,515 in Wednesday’s early Asian session.
The softer USD and bets of Fed easing monetary policy support the Gold price.
The Fed Chair Powell's speech at the Jackson Hole symposium will take centre stage on Friday.

Lallalit Srijandorn FXStreet

Gold price (XAU/USD) trades flat around $2,515 during the early Asian session on Wednesday. However, the weaker US Dollar (USD) and the expectation that the Federal Reserve (Fed) will likely cut interest rates in September might underpin the yellow metal.

The weaker US Dollar amid expectations of easing monetary policy by the Fed ahead of the Jackson Hole symposium might provide some support to the precious metal as it makes gold more attractive for other currency holders. Markets have priced in about a 67.5% possibility of the Fed cutting interest rates by 25 basis points (bps) in September, according to the CME FedWatch Tool.

"The primary drivers of the gold price move are financial investment demand, particularly with ETF buying improving and overall improved sentiment as the expectations of the Fed easing cycle begin in September," said Aakash Doshi, head of commodities, North America at Citi Research.

Traders will closely watch Fed Chair Powell's speech at the Jackson Hole symposium on Friday for more cues on rate cuts. Dovish comments from the Fed officials might further lift the yellow metal. Furthermore, the ongoing geopolitical tensions in the Middle East might boost the safe-haven asset demand, benefiting the Gold price.

On the other hand, signs of weaker physical demand in China might cap the upside for Gold. Data showed that the country’s Imports of the precious metal in July fell 24% to 44.6t, the lowest level in more than two years. The sluggish economy in China could weigh on the precious metal as China is the largest producer and consumer of gold.

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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