Gold remains subdued as inflationary risks reduce Fed rate cut bets

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Gold price (XAU/USD) extends its losses for the second successive session, trading around $5,150 during the Asian hours on Thursday. The bullion price slides as surging oil prices heightened inflationary risks and reduced the likelihood of Federal Reserve (Fed) interest rate cuts.

Gold falls as surging oil prices fuel inflation concerns and reduce expectations of Federal Reserve rate cuts.
Bullion faces pressure from a stronger US Dollar and rising Treasury yields amid growing forward-looking inflation concerns.
Oil prices climbed again as tightening supply from the Iran conflict outweighed coordinated emergency reserve releases by major economies.

Gold came under pressure as well from a rallying US Dollar (USD) and surging Treasury yields as forward-looking inflation concerns dimmed prospects for a Fed easing, with forecasts currently pointing to only one rate reduction later this year. In the near term, gold prices are likely to remain sensitive to geopolitical headlines, energy prices, and upcoming economic data.

Oil prices climbed for a second day as the prospect of a protracted Iran war overshadowed a coordinated release of oil reserves by major economies. Markets also viewed the emergency oil release as insufficient even after the IEA agreed to its largest-ever release of 400 million barrels of oil.

Iran’s Islamic Revolutionary Guard Corps (IRGC) said it launched a joint operation with Lebanon's Hezbollah against targets in Israel, Jordan, and Saudi Arabia. Bahrain's Interior Ministry said on Thursday that Iran has targeted fuel tanks at a facility in Muharraq Governorate, one of Bahrain’s four administrative regions.

Gold prices may experience volatility as investors react to the latest US inflation data. The February US Consumer Price Index (CPI) released on Wednesday showed inflation rising 0.3% month-over-month (MoM) and 2.4% year-over-year, largely in line with market expectations. Core CPI, which excludes food and energy, increased 0.2% MoM and 2.5% YoY. US Personal Consumption Expenditures (PCE) will be eyed on Friday.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.