- Gold prices were slightly higher around $2,465 in early Asian trading on Wednesday.
- Rising tensions in the Middle East have boosted demand for gold as a safe-haven asset, benefiting it.
- Attention on Wednesday will be on the release of the US Consumer Price Index for July.
Gold prices (XAU/USD) were up slightly around $2,465 in early Asian trading on Wednesday. The rise in gold prices could be supported by safe haven flows amid ongoing tensions in the Middle East. Traders will be keeping a close eye on the release of the U.S. Consumer Price Index (CPI) for July later on Wednesday.
Safe-haven demand amid rising tensions in the Middle East could boost precious metal prices in the short term. The BBC reported on Tuesday that the United States has sent missile-equipped submarines to the region amid rising tensions. The action comes in response to fears of escalating regional conflict following the recent assassinations of senior Hezbollah and Hamas leaders. Analysts at Saxo Bank noted that gold remains “supported by geopolitical risks amid rising tensions involving Iran, Israel and Ukraine, as well as expectations of a Federal Reserve rate cut.”
Atlanta Fed President Raphael Bostic said Tuesday that recent economic data has made him “more confident” the Fed can get inflation back to its 2% target. Still, he needs more evidence before he’s ready to support cutting interest rates.
The U.S. CPI inflation report due on Wednesday could give some hints as to the direction of the Federal Reserve’s interest rate cuts. CPI is expected to increase 0.2% month-on-month in July, after falling 0.1% the previous month. On an annual basis, CPI inflation is forecast to fall to 2.9% in July from 3.0% in June.
Weaker numbers could increase the likelihood of a Fed rate cut in September, while rising inflation could reduce the likelihood of an easier monetary policy from the Fed, likely putting selling pressure on low-yielding gold.
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.
