Gold price slips as Fed holds rates, warns of heightened inflation
- Fed leaves rates unchanged at 4.25%–4.50% and highlights rising uncertainty in economic outlook.
- Policymakers note solid growth and a strong labor market but flag elevated inflation risks.
- Balance sheet reduction to continue as planned; traders eye Powell's comments for policy direction.
Gold price remains on the back foot after the Federal Reserve (Fed) kept interest rates unchanged. XAU/USD trades at $3,394, down over 1%, as traders brace for Fed Chair Jerome Powell's press conference.
XAU/USD down over 1% to $3,394 as traders await Powell’s press conference following cautious Fed tone
The Federal Reserve held rates at the 4.25%-4.50% range unanimously, as expected, and mentioned that uncertainty about the economic outlook has increased further, adding that the risks of higher unemployment and inflation have risen.
Fed officials added that the economy remains expanding at a solid pace, acknowledging that the labor market remains solid, but inflation risks are seen as somewhat elevated.
Regarding the balance sheet reduction, the statement said, “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.”
Gold price reaction
Gold prices slightly jumped past $3,390 but failed to get to $3,400. However, the main catalyst could be the Fed Chair Jerome Powell's tone at the press conference. If he stays as hawkish as he has previously been, further XAU/USD downside is expected, which could put into play a test of the $3,350 figure ahead of the $3,300 mark.
Conversely, a dovish stance could pave the way for Gold buyers to test $3,450 and possibly the record high of $3,500.
Gold FAQs
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.
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.
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.
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
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
