Gold declines to near $4,850 as low liquidity, easing tensions weigh on demand

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Gold price tumbles to near $4,860 in Wednesday’s early Asian session.
Low liquidity and easing geopolitical tensions weigh on the yellow metal.
The FOMC Minutes will be in the spotlight later on Wednesday.

Gold price (XAU/USD) attracts some sellers to around $4,860 during the early Asian trading hours on Wednesday. The precious metal falls amid thin holiday trading, with much of Asia closed for the Lunar New Year. Traders will keep an eye on the Minutes of the Federal Open Market Committee (FOMC), which will be published later on Wednesday.

Market liquidity remained low due to holidays in major regions. “With China on holiday for much of the week, liquidity is thinner and it’s unclear whether there’s enough momentum to push prices materially lower or whether dip buyers will be tempted back should we see renewed softness in the US dollar,” said Fawad Razaqzada, a market analyst at Forex.com.

Furthermore, easing tensions between the United States (US) and Iran could undermine traditional safe-haven assets such as Gold. Iranian Foreign Minister Abbas Araqchi said on Tuesday that both countries reached an understanding on the main “guiding principles” in talks aimed at resolving their longstanding nuclear dispute, but that does not mean a deal is imminent.

Traders will closely monitor the FOMC Minutes for more clues from the US Federal Reserve (Fed) about the future interest rate path. Any dovish stance by the US central bank could drag the US Dollar (USD) lower and support USD-denominated commodity prices 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.