- Gold prices were trading flat around $2,455 in early Asian trading on Friday.
- US retail sales rose 1.0% month-on-month in July, beating expectations. Initial jobless claims fell 7,000 from the previous week to 227,000.
- Rising geopolitical risks in the Middle East could limit gold’s declines.
Gold prices (XAU/USD) were trading sideways around $2,455 in early Asian trading on Friday. The metal has been fluctuating between ups and downs amid a stable US Dollar (USD). Traders will be keeping an eye on the preliminary US Michigan Consumer Sentiment Index for August, as well as building permits and housing starts figures.
Positive employment data and strong retail sales have reduced speculative interest in the world’s largest economy and eased fears of a possible recession, but traders still expect the Federal Reserve to begin easing policy in September. According to the CME FedWatch tool, the market is currently pricing in a nearly 80% chance of a rate cut in September and expects 200 basis points (bps) of cuts over the next 12 months, but this will depend on upcoming data.
U.S. retail sales increased 1.0% month-on-month in July, recovering from a 0.2% decline in June, according to data released by the U.S. Census Bureau on Thursday. The figure beat expectations of a 0.3% increase. Meanwhile, initial jobless claims for the week ending August 10 came in at 227,000, beating expectations of 235,000 and down from 234,000 the previous week. The recent strong jobs report and favorable retail sales figures have helped push the U.S. dollar higher broadly and pressured precious metals.
Still, rising geopolitical risks in the Middle East may provide some support to the price of gold, a traditional safe haven asset. According to local news source Al Jazeera, Gaza’s health ministry says more than 40,000 Palestinians have been killed in Israeli attacks since Oct. 7, with many more trapped under rubble and at risk from disease.
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.
