Gold trades sideways as markets await Fed guidance, monitor US-Iran peace deal

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Gold (XAU/USD) trades around $4,332.60 on Wednesday at the time of writing, little changed on the day, as investors remain cautious ahead of the Federal Reserve’s (Fed) monetary policy decision.

Gold trades around $4,332.60 and lacks clear direction ahead of the Federal Reserve’s monetary policy decision.
Investors await updated economic projections and guidance from Kevin Warsh on the future path of interest rates.
The interim US-Iran peace deal keeps pressure on the US Dollar and provides limited support to the precious metal.

Gold (XAU/USD) trades around $4,332.60 on Wednesday at the time of writing, little changed on the day, as investors remain cautious ahead of the Federal Reserve’s (Fed) monetary policy decision. The yellow metal continues to fluctuate within a narrow range, with markets reluctant to place significant directional bets before one of the most closely watched macroeconomic events of the week.

The main catalyst for financial markets remains the Federal Open Market Committee (FOMC) meeting. The Fed is widely expected to leave its benchmark interest rate unchanged within the 3.5%-3.75% range, but attention is focused on the updated economic projections, including the so-called dot plot, as well as comments from Fed Chair Kevin Warsh during his press conference.

Investors are looking for clues on whether the US central bank maintains a restrictive stance as inflation remains relatively persistent. According to several analysts, the Fed could remove its easing bias and adopt a more cautious tone regarding potential rate cuts, a scenario that could support the US Dollar (USD) in the near term, which generally supports Dollar-denominated assets such as Gold.

Meanwhile, the announcement of a framework agreement between the United States (US) and Iran continues to influence market sentiment. The memorandum includes a 60-day ceasefire and the reopening of the Strait of Hormuz, reducing concerns about disruptions to global energy supplies. This geopolitical easing has contributed to recent weakness in the US Dollar.

However, several uncertainties remain regarding the details of the agreement, while differences persist between Washington and Tehran over future negotiations concerning Iran’s nuclear program. This uncertainty is limiting market moves and encouraging a wait-and-see approach ahead of the Fed announcement.

Gold’s next move will likely depend on the message delivered by the US central bank. A more dovish-than-expected tone could strengthen demand for the precious metal, while a more hawkish Fed could support US yields and the US Dollar, limiting Gold’s upside potential in the short 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.