Gold falls to near $5,100 as inflation fears weigh amidst Middle East conflict

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Gold tumbles to around $5,100 in Wednesday’s early Asian session.
Inflation ‌concerns intensified amid fears of a potentially prolonged Middle East conflict.
Persistent geopolitical risks might help limit the Gold’s losses.

Gold price (XAU/USD) faces some selling pressure near $5,100 during the early Asian session on Wednesday. The precious metal falls amid a renewed US Dollar (USD) demand and dimming prospects for US rate cuts. The US ISM Services Purchasing Managers Index (PMI) report will be published later on Wednesday.

Inflation concerns are resurfacing as oil prices rise, leading markets to reduce the likelihood of a Federal Reserve (Fed) interest rate cut. The Greenback climbed to a three-month high, making USD-denominated gold more expensive for international buyers. Markets largely expect the US central bank to leave the interest rate unchanged until the summer, though US President Donald Trump has pushed for lower rates.

“The move lower in gold appears to be driven by a flight to liquidity - a flight to cash. We have a strong dollar and bond yields trading higher,” said Bob Haberkorn, senior market strategist at RJO Futures.

Nonetheless, the potential downside for the yellow metal might be short-lived, and flight to safety flows are driven by geopolitical risk. US Secretary of State Marco Rubio said all personnel are accounted for after a drone hit the grounds of the US consulate in Dubai, per CNN. The US earlier closed embassies in Saudi Arabia, Kuwait, and Lebanon and warned Americans to leave some countries in the region. Meanwhile, the Israeli army conducts a fresh land invasion into Lebanon's south to destroy Hezbollah and escalates airstrikes on the country.

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.