Gold edges lower below $4,350 as Fed rate hike expectations grow

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Gold price (XAU/USD) trades with mild losses around $4,325 during the early Asian session on Tuesday. The precious metal remains on the defensive near its lowest since March 24 amid uncertainty in the Middle East and rising bets of a US interest rate hike.

Gold price posts modest losses near $4,325 in Tuesday’s early Asian session.
Iran said it was halting its strikes against Israel but will resume hostilities if Israel continues to attack Lebanon.
Traders raise their bets on a Fed rate hike after a stronger US jobs report.

Bloomberg reported on Monday that Iran and Israel agreed to ease strikes against each other after a flare-up in violence threatened to derail peace negotiations and led US President Donald Trump to appeal for de-escalation.

Iran had earlier announced an end to its military operations against Israel. However, its central military command warned that if Israel continued to attack, including in southern Lebanon, “much harsher and more crushing actions than before will be on the way."

Traders will closely monitor the developments surrounding the Middle East situation. Rising tensions in the region continue to fuel concerns over inflation and expectations of elevated interest rates.

Furthermore, strong US jobs data boosted expectations of a Federal Reserve (Fed) rate hike. It’s worth noting that Gold is often used amid geopolitical uncertainty but does not yield interest, making it less attractive when interest rates are high.

Traders are now pricing in a 43% probability of a quarter-point rate hike in December, up from just about 14% a month ago, according to the CME FedWatch tool. Traders brace for the US Consumer Price Index (CPI) data on Wednesday and the Producer Price Index (PPI) data on Thursday for more clues on the Fed's interest rate path.

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.