Gold tumbles below $4,650 as inflation fears and liquidity squeeze weigh

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Gold price (XAU/USD) remains under selling pressure near $4,640 during the early Asian session on Friday. The precious metal extends the decline as soaring crude oil and energy prices, driven by the escalating US-Israeli war with Iran, reignite inflation fears.

Gold price remains on the defensive around $4,640 in Friday’s early Asian session.
Concerns about inflationary pressure and liquidity squeeze weigh on the Gold price.
Escalating tensions in the Middle East could support the safe-haven flows.

Gold took a breather after the US Federal Reserve (Fed) left interest rates unchanged on Wednesday and expressed concern about the impact of rising oil prices on inflation. Fed Chair Jerome Powell said that the possibility of a rate hike has come up in policy committee discussions. Hawkish remarks from Fed officials lift the US Dollar (USD) and weigh on the USD-denominated commodity price.

Traders have been selling liquid assets like yellow metal to cover margin calls and raise cash during the broader market volatility. “Global markets have seen broad selloffs as investors search for the quickest assets to sell. Perhaps we are now seeing the next leg of this phase where the perceived safe haven assets are sold to fund purchases of those that may have overreacted to the current situation,” said Paul Surguy, managing director and head of investment management and proposition at Kingswood Group.

On the other hand, rising geopolitical risks could boost traditional safe-haven assets such as Gold. Iranian Foreign Minister Abbas Araghchi vowed to show “ZERO restraint” if the country’s energy infrastructure were hit again, per Bloomberg. Meanwhile, Saudi Foreign Minister Faisal bin Farhan Al Saud warned that the kingdom’s restraint isn’t "unlimited" and added it could take military action.

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.