Gold Price Forecast: XAU/USD recovers above $4,950 as US-Iran tensions boost safe-haven demand

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Gold price (XAU/USD) trades in positive territory near $4,985 during the early Asian session on Wednesday. The precious metal extends the rebound after a historic and volatile sell-off last week. Traders weigh the next round of US economic signals and the broader demand for safe-haven assets.

Gold price recovers to around $4,985 in Wednesday’s early Asian session.
US warplane shot down an Iranian drone that “aggressively approached” the USS Abraham Lincoln, boosting the safe-haven flows.
The nomination of Kevin Warsh as the next Fed Chair might cap the Gold’s upside.

CNBC reported on Tuesday that the US military shot down an Iranian drone that "aggressively" approached the USS Abraham Lincoln aircraft carrier in the Arabian Sea. The incident occurred as tensions in the Middle East are high, with US President Donald Trump weighing potential military strikes against the Islamic Republic.

Iran demanded that talks with the US this week take place in Oman rather than Turkey, and that the scope be limited to two-way conversations on the nuclear issue only, complicating an already delicate diplomatic effort. Traders will closely monitor the developments surrounding US-Iran negotiations. Any signs of escalating tensions between the US and Iran could boost traditional safe-haven assets such as Gold in the near term.

On the other hand, the nomination of Kevin Warsh as Federal Reserve (Fed) chairman might cap the upside for the yellow metal. Markets see Warsh as a "hawkish" pick for Fed Chair and likely to keep interest rates elevated.

Traders dialed back expectations for a Fed rate cut following the Fed's January pause and the nomination of Warsh. Financial markets currently priced in nearly a 66% odds of a rate reduction at the June policy meeting, according to the CME FedWatch tool.

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.