Gold Price Forecast: XAU/USD climbs above $4,250 as Fed rate cut weakens US Dollar

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Gold price (XAU/USD) rises to seven-week highs near $4,275 during the early Asian session on Friday. The precious metal extends its upside as the US Federal Reserve’s (Fed) quarter-point rate cut drags the US Dollar (USD) lower.

Gold price gains momentum to around $4,275 in Friday’s early Asian session.
The Fed’s decision on Wednesday to cut rates by 25 basis points in a split vote supports the yellow metal.
Positive developments surrounding the Ukraine peace deal might cap the upside for the Gold price.

The number of Americans filing new applications for unemployment benefits increased by the most in nearly four and a half years last week, according to the US Department of Labor (DOL) on Thursday. This weaker-than-expected jobs data weighs on the Greenback and provides some support to the USD-denominated commodity price.

The Fed decided to cut rates by 25 basis points (bps) in a split vote on Wednesday, putting it in a range of 3.50% to 3.75%, its lowest level in three years. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.

However, Fed policymakers signaled a likely pause in further reductions as they monitor labor market trends and inflation that "remains somewhat elevated.” Markets are currently pricing in nearly a 78% probability that the Fed will hold interest rates steady next month, compared with a 70% odds just before the rate cut announcement, according to the CME FedWatch tool.

Hopes for a Ukraine peace deal could undermine a traditional safe-haven asset like Gold. Ukrainian President Volodymyr Zelensky said on Thursday that Kyiv’s delegation spoke with top US officials to discuss security guarantees for Ukraine in a video call after presenting America with a revised 20-point framework to end the war with Russia.

(This story was corrected on December 12 at 00:30 GMT to say, in the first bullet point, that Gold price gains momentum to around $4,275 in Friday’s early Asian session, not European session.)

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.

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