Gold weakens on US-Iran de-escalation, expectations of Fed tightening

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Gold (XAU/USD) trades around $4,050 at the time of writing on Monday, down 0.96% on the day, as investors slightly reduce their exposure to safe-haven assets following the latest developments surrounding tensions between the United States (US) and Iran.

Gold falls nearly 1% after signs of de-escalation between the United States and Iran.
Markets remain cautious ahead of US-Iran talks in Doha on Tuesday and US labor market data later this week.
Expectations for a restrictive monetary policy continue to weigh on the appeal of the precious metal.

After an exchange of strikes near the Strait of Hormuz over the weekend, a US official said on Sunday that Washington and Tehran would stand down on attacks to allow vessels to move freely. According to Axios, both sides are set to resume negotiations in Doha on Tuesday to continue discussions on all areas covered by their Memorandum of Understanding.

According to Reuters, Iranian President Masoud Pezeshkian said, citing the state news agency IRNA, that $6 billion of the $12 billion in Iranian assets frozen in Qatar should be released. The move could be viewed as a confidence-building measure ahead of the next round of US-Iran talks in Doha.

Despite this easing in tensions, markets remain cautious. Iran's Foreign Minister Abbas Araghchi reiterated that responsibility for the Strait of Hormuz lies solely with Tehran and warned that any attempt to bypass Iran's preferred route could trigger renewed tensions. The Strait of Hormuz remains a strategic chokepoint for nearly 20% of global energy flows, keeping investors alert to any risk of supply disruptions.

At the same time, traders continue to assess the monetary policy outlook of the Federal Reserve (Fed). Higher energy prices driven by geopolitical tensions continue to fuel inflation concerns, supporting expectations that interest rates could remain elevated for longer and reducing the appeal of non-yielding assets such as Gold.

According to the CME FedWatch tool, markets are now pricing in roughly a 48% chance of a rate hike as early as September. Attention now turns to the June US labor market report, with the Nonfarm Payrolls (NFP) release due on Thursday. Economists expect the US economy to have added 114K jobs while the Unemployment Rate is forecast to remain unchanged at 4.3%, data that could influence expectations for the Fed's policy path.

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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