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Gold slumps to near $4,250 as Fed holds rates but flags potential hike this year

  • Gold price falls to near $4,280 in Thursday’s early Asian session. 
  • Fed decided to leave the policy rate in its current 3.50%-3.75% range.
  • Iran to define Strait of Hormuz administration with Oman and the Gulf States.  

Gold price (XAU/USD) tumbles to around $4,280 during the early Asian session on Thursday. The precious metal faces some selling pressure after the US Federal Reserve (Fed) decided to hold its benchmark interest rate steady but signaled a hike in borrowing costs later this year. 

The Federal Open Market Committee (FOMC) on Wednesday voted unanimously to hold its benchmark federal funds rate in a range of 3.5% to 3.75% in its first gathering under Kevin Warsh’s leadership.

New Fed Chairman Kevin Warsh vowed to restore price stability following his first policy meeting since taking the helm of the US central bank after officials left interest rates unchanged and hinted at growing support for rate hikes this year. It’s worth noting that Gold is often used as a hedge against inflation but does not yield interest, making it less attractive when interest rates are high.

Markets now see a 83.1% chance of a rate hike in December this year, jumping from 61% before the Fed decision, according to the CME FedWatch Tool.

On the geopolitical front, Iran and the US are expected to formally sign a memorandum of understanding to end the war on Friday in Geneva. According to the agreement, Tehran will allow commercial ships to pass safely and without paying tolls for 60 days under the terms of the MOU. Iran will then “conduct a dialogue” with Oman to define the future administration and maritime services in Hormuz in discussion with the other Gulf states. 

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

Lallalit Srijandorn

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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