Gold Price Forecast: XAU/USD holds above $2,500 amid persistent geopolitical risks, hopes for Fed rate cuts

Gold price drifts higher to $2,505 in Monday’s early Asian session.
The recent US Housing Starts added to concerns over the economy's strength and triggered the expectation of Fed rate cuts.
Escalating geopolitical tensions boosts the safe-haven asset like Gold.

Lallalit Srijandorn FXStreet

Gold price (XAU/USD) gains momentum around $2,505 during the early Asian session on Monday amid hopes of the US Federal Reserve (Fed) rate cuts in September. Gold traders will take more cues from the first reading of the US S&P Global Purchasing Managers Index (PMI) and Fed Chair Jerome Powell's speech this week.

The precious metal rose to an all-time high on Friday as investors placed more bets on interest rate cuts from the US Fed in September. US economic data last week showed that Retail Sales beat estimates, but the US Producer and Consumer Price Indexes indicated inflation was subsiding.

Additionally, the US Housing Starts fell by 6.8% in July to 1.238 million units from the 1.1% increase in June, the lowest level since 2020. This figure added to concerns over the economy's strength, especially after recent softer inflation and labor reports. This, in turn, fuels deeper reductions by the Fed and underpins the yellow metal as lower interest rates generally reduce the opportunity cost of holding non-yielding bullion.

Federal Reserve Bank of Chicago President Austan Goolsbee said on Sunday that the US economy does not show signs of overheating, thus Fed policymakers should be cautious about keeping restrictive policy in place longer than necessary. The markets are now pricing in nearly 76% chance of a 25 basis points (bps) Fed rate cut in its September meeting, according to the CME FedWatch Tool.

The ongoing geopolitical tensions in the Middle East and the war in Ukraine all contribute to the safe-haven demand for gold. Conflict between Hezbollah and Israel has escalated over the weekend, despite diplomatic attempts to de-escalate tensions to prevent an expected Hezbollah-Iran strike on Israel, per the Guardian. The news agency reported that an Israeli attack on Saturday was one of the bloodiest for civilians since fighting began in October.

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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