- Gold prices gained momentum to near $2,720 in early Asian time on Monday.
- Uncertainty and geopolitical risks surrounding the US election have increased demand for safe-haven assets such as gold.
- Concerns about China's economic slowdown could weigh on XAU/USD.
Gold prices (XAU/USD) expanded to around $2,720 in early Asian time on Monday. Tensions in the Middle East and uncertainty surrounding the US presidential election are accelerating flows into safe-haven assets.
The rally in precious metals has been fueled by continued geopolitical tensions in the Middle East, uncertainty surrounding the US election, and softening expectations of the US Federal Reserve's monetary policy. “As the conflict escalates, especially after Hezbollah announced it would escalate its war with Israel, investors are flocking to the traditional safe-haven asset gold,” said Alexander Zumpfe, a precious metals trader at Heraeus Metals Germany. ” he pointed out. “Momentum, along with concerns about the U.S. presidential election and expectations for monetary easing, further accelerated the rally,” Zumpfe added.
Furthermore, the prospect of further Fed interest rate cuts continues to support gold prices. The U.S. central bank lowered interest rates for the first time in more than four years at its September meeting. According to the CME FedWatch Tool, there is a more than 90% chance of another 1/40th rate cut in November. Generally, when interest rates fall, the opportunity cost of holding non-yielding bullion decreases, causing the price of gold to rise.
On the other hand, precious metals may suffer due to the downturn in China's economy. China's economy grew at its slowest pace since early last year in the third quarter. The National Bureau of Statistics reported on Friday that GDP rose 4.6% year-on-year in the third quarter (up 4.7% a year earlier). This figure was lower than the government's target for this year, which was “around 5%.'' This could weigh on the yellow metal as China is the world's largest consumer of gold.
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 could 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 typically 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.
