Gold Price Forecast: XAU/USD edges higher above $4,200 on US rate cut expectations

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Gold price (XAU/USD) extends the rally to near $4,230 during the early Asian trading hours on Tuesday. The precious metal edges higher to a near six-week high amid growing expectations of US interest rate cuts.

Gold price drifts higher to around $4,230 in Tuesday’s early Asian session.
Growing expectations for US monetary easing support the Gold price.
Renewed US Dollar demand might cap the upside for XAU/USD.

The US Manufacturing Purchasing Managers Index (PMI) contracted for the ninth straight month in November, the Institute for Supply Management (ISM) showed on Monday. The Manufacturing PMI declined to 48.2 in November, versus 48.7 prior, below the estimation of 48.6. Following softer US economic data, traders have increased December rate-cut bets to an 87% chance, according to the CME FedWatch tool. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.

“The underlying environment of expectations of further rate cuts, along with inflationary pressure still above the Fed target... is still the underlying support in gold and silver,” said David Meger, director of metals trading at High Ridge Futures.

On the other hand, China’s physical Gold demand softens at high prices, which could drag the yellow metal price lower. The Financial Times reported that large retail chains have reduced their footprint in mainland China this year, while several small sellers said surging prices and a growing tax burden had torpedoed sales.

This week's key US macro releases could drive the US dollar (USD) demand and influence the near-term trajectory for the Gold price in the near term. Traders will take more cues from the US ADP Employment Change and ISM Services PMI reports on Wednesday, ahead of the key Personal Consumption Expenditures (PCE) Price Index inflation data. If the data come in stronger than expected, this could boost the Greenback and weigh on the USD-denominated commodity price.

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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