- Gold prices rebounded to around $2,690 in Friday's Asian session, up 42% on the day.
- Gold demand and geopolitical risks are likely to support gold prices.
- The Fed's cautious stance due to President Trump's tariff policy could put pressure on USD-denominated gold.
Gold prices (XAU/USD) regained some ground during Friday's Asian trading hours to around $2,690 after retreating from a five-week high in the previous session. All eyes will be on the US Federal Reserve's (Fed) interest rate decision next week.
Gold purchases by central banks, including the People's Bank of China, could provide some support for the yellow metal. The People's Bank of China resumed gold purchases for the first time in six months in November, increasing its reserves to 72.96 million fine troy ounces. The move comes as the Chinese government plans a more aggressive fiscal approach in 2024, signaling a shift to “appropriately accommodative” monetary policy. Analysts at Goldman Sachs said the People's Bank of China (PBOC) “may even increase demand for gold during the financial crisis.” A depreciation of the domestic currency is necessary to increase confidence in the domestic currency. ”
Additionally, rising tensions in the Middle East could increase demand as a safe haven, benefiting precious metals. Israeli airstrikes killed at least 30 Palestinians and wounded 50 others who had taken refuge at a post office in the central Gaza Strip, bringing the death toll in the enclave to 66 on Thursday, Reuters reported. .
Meanwhile, speculation that President-elect Donald Trump's tariff policies could spur inflation could prompt the Fed to take a more cautious stance on lowering interest rates. This could be a headwind for non-yielding assets such as gold. Traders are currently pricing in a nearly 96.4% chance that the Fed will cut rates by 25 basis points (bps) at its December meeting, according to CME Group's FedWatch tool.
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 up gold prices.
