Gold Price Forecast: XAU/USD rises above $5,000 as ongoing US-Iran tensions boost safe-haven demand

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Gold price (XAU/USD) jumps to around $5,005 during the early Asian session on Thursday. The precious metal rebounds following a period of intense volatility. Traders weigh the next round of US economic signals and the broader demand for safe-haven assets.

Gold price climbs to near $5,005 in Thursday’s early Asian session.
Ongoing geopolitical uncertainty continues to boost the safe-haven flows.
The nomination of Kevin Warsh as Fed chair might cap the Gold’s upside.

The rally of the yellow metal is bolstered by a safe-haven demand after the US military shot down an Iranian drone that "aggressively" approached the USS Abraham Lincoln aircraft carrier in the Arabian Sea, sparking fears of US-Iran escalation. Iranian and US officials confirmed on Wednesday that talks between their countries would be held in Oman on Friday. Traders will closely monitor the developments surrounding the negotiation.

Analysts believe the volatility of precious metals will persist after the price plunge. “We will maintain higher volatility environments than we had historically, but not what we’ve had over the last few days unless we run up another spec bubble,” said Niklas Westermark, head of EMEA commodities trading at BofA.

Nonetheless, a Federal Reserve (Fed) leadership shift might cap the upside for Gold. Markets anticipated a more hawkish and independent Fed under Warsh. 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 46% 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.