Gold declines below $4,500 as Iran tensions stoke inflation fears and bolster Fed hike bets

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Gold price (XAU/USD) declines to around $4,485 during the early Asian session on Tuesday. The precious metal loses ground as renewed tensions in the Middle East continue to fuel concerns over inflation and expectations of elevated interest rates.

Gold price edges lower to near $4,485 in Tuesday’s early Asian session.
Iran stops negotiations with US, vows to ‘completely’ block Strait of Hormuz.
Traders await the US May employment data on Friday for fresh impetus.

CNBC reported on Monday that Iranian negotiators will stop exchanging messages with the United States (US) through intermediaries, and Iran will move to fully close the Strait of Hormuz, in retaliation for ongoing ceasefire violations. Meanwhile, US President Donald Trump shrugged off the possible collapse of peace negotiations with Iran, saying, “I don’t care if they’re over, honestly.”

“The optimism surrounding negotiations between the US and Iran aimed at ending the standoff in the Strait of Hormuz faded over the weekend,” said Ricardo Evangelista, ActivTrades analyst. “As a result, energy prices rebounded, reviving inflation concerns and reinforcing hawkish Federal Reserve expectations,” he added.

Financial markets are now pricing in a Federal Reserve (Fed) rate hike as early as this year, with a 39% probability of a quarter-point increase in December, according to the CME FedWatch tool.

The US employment data for May will be in the spotlight later on Friday. This report could offer some hints about the Fed’s monetary policy path and the implications for gold prices. Any signs of weakening in the US labour market could weigh on the US Dollar (USD) and support the USD-denominated commodity price in the near term.

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.