- Gold is trading flat around $2,625 in early Asian session on Monday.
- The Fed's more cautious approach to monetary easing next year will push gold prices lower.
- Weakening US PCE inflation statistics, a recovery in Chinese gold demand, and geopolitical risks could weigh on XAU/USD.
Gold prices (XAU/USD) were stable around $2,625 in early Asian trading on Monday. The US Federal Reserve's hawkish stance could weigh on the yellow metal. However, the downside could be capped if the dollar weakens following weak inflation reports.
The Fed lowered interest rates at its December meeting, as expected, but signaled it may further slow the decline in borrowing costs. The Fed's dotplot (a graph that predicts the future path of interest rates) showed a 0.5 percentage point cut in rates in 2025, compared to the across-the-board cut expected in September. This will continue to push the US dollar (USD) higher, hurting USD-denominated gold, as higher real interest rates increase the opportunity cost of gold.
Meanwhile, weaker-than-expected U.S. inflation data could help limit losses for precious metals. U.S. inflation, as measured by the personal consumption expenditures (PCE) price index, was 2.4% year over year in November, up from 2.3% in October. This figure was below the market consensus of 2.5%. Meanwhile, core PCE rose 2.8% in November compared to 2.8% last time, but was lower than the expected 2.9%.
China is the world's largest consumer of gold, so rising demand for gold in China could contribute to the rise in the yellow metal. There are less than six weeks until Lunar New Year, when the world's biggest gold-buying festival will overtake India's Diwali. Additionally, ongoing geopolitical tensions in the Middle East could increase capital flows into safe-haven assets, benefiting gold prices.
Gold FAQ
Gold has played an important role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from their brilliance and use as jewellery, precious metals are widely seen as safe assets, meaning they are considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. With the aim of supporting their currencies in times of turmoil, central banks tend to purchase gold to diversify foreign exchange reserves and improve perceptions of economic and currency strength. High gold reserves can be a source of confidence in a country's solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest annual purchase amount since records began. Central banks in emerging countries such as China, India and Türkiye are rapidly increasing their gold reserves.
Gold has an inverse relationship with the US dollar and US Treasuries, which are major reserve and safe haven assets. Gold tends to rise when the dollar falls, allowing investors and central banks to diversify their assets during times of turmoil. Gold is also inversely correlated with risk assets. Rising stock markets tend to push gold prices down, while declines in riskier markets tend to favor the precious metal.
Prices may vary depending on various factors. Geopolitical instability and fears of a deep recession can cause the price of gold to quickly rise from its safe-haven status. Gold, a non-yielding asset, tends to rise when interest rates fall, but rising costs usually put pressure on the yellow metal. Still, most moves will depend on how the US dollar (USD) behaves, as the asset is priced in dollars (XAU/USD). A strong dollar tends to suppress gold prices, while a weak dollar can push gold prices up.
