- Gold prices were slightly higher around $2,450 in early Asian trading on Thursday.
- US CPI inflation rose as expected in July.
- Any signs of escalating geopolitical tensions could rally safe-haven assets such as gold.
Gold prices (XAU/USD) snapped a two-day slide early Thursday in Asian trading, rising to near $2,450. A weakening US Dollar (USD) provided some support for the precious metal on the day. Investors will get more clues from U.S. retail sales, weekly jobless claims, Philadelphia Fed manufacturing index and industrial production figures due for release later on Thursday.
US inflation rose in July as expected, according to data released by the Labor Department on Wednesday. The headline Consumer Price Index (CPI) rose 0.2% month-on-month in July, bringing annual inflation to 2.9%, while the core CPI, which excludes food and energy, rose 0.2% month-on-month in July, bringing annual inflation to 3.2%, in line with consensus.
“Expectations are now leaning toward a 25-basis-point cut, which may have dampened some of the momentum in the gold market,” said Philip Streible, chief market strategist at Blue Line Futures. The market is now pricing in a nearly 41% chance of a 50-basis-point (bps) Fed cut in September, according to the CME FedWatch tool, down from 50% before the U.S. CPI data was released.
Federal Reserve officials have signaled their intention to ease policy while being careful not to commit to a specific timeline or pace for rate cuts, and Atlanta Fed President Raphael Bostic said Tuesday he wants to see more evidence before supporting rate cuts.
Meanwhile, ongoing geopolitical tensions and economic uncertainty could encourage safe-haven flows, benefiting gold. Iran has rejected calls from Britain and other Western countries to refrain from retaliating against Israel after the assassination of Hamas leader Ismail Haniyeh in Tehran last month, according to the BBC.
Gold FAQ
Gold has played a vital role throughout human history, as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not tied to any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country’s solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.
Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold’s status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to suppress gold prices, while a weak dollar can boost gold prices.
