Gold Price Forecast: XAU/USD declines to near $4,200 as traders await hawkish cut from Fed

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Gold price (XAU/USD) trades in negative territory near $4,210 during the early Asian session on Wednesday.

Gold price drifts lower to around $4,210 in Wednesday’s early Asian session.
The Federal Reserve is widely expected to cut the interest rate by 25 basis points on Wednesday.
Strong demand from major central banks might help limit Gold’s losses.

Gold price (XAU/USD) trades in negative territory near $4,210 during the early Asian session on Wednesday. The precious metal edges lower as traders expect the Federal Open Market Committee (FOMC) to take a hawkish approach to future easing of monetary policy at its upcoming policy meeting on Wednesday.

The Federal Reserve (Fed) is likely to deliver its third straight interest rate cut on Wednesday, which will bring the federal funds rate down to a target range of 3.50% to 3.75%. Fed funds futures traders are now pricing in nearly a 90% chance of a rate reduction in the December meeting, up from 71% probability earlier this month, according to the CME FedWatch Tool.

Nonetheless, analysts believe Fed Chair Jerome Powell's press conference will likely suggest a higher bar for future rate cuts, possibly hinting at a pause after this move. The ‘hawkish cut’ from the US central bank could weigh on the non-yielding yellow metal in the near term.

“The likeliest outcome is a kind of hawkish cut where they cut, but the statement and the press conference suggesting that they may be done cutting for now,” said Bill English, the Fed’s former director of monetary affairs and now a Yale professor.

On the other hand, major central banks' demand for Gold might support its upside. Official data on Sunday showed that the People’s Bank of China (PBoC) added to its gold reserves for a 13th straight month. Bullion held by the Chinese central bank rose by 30,000 troy ounces last month, bringing the total to around 74.12 million troy ounces.

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.