Gold holds steady near $5,000 ahead of Fed rate decision

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Gold price (XAU/USD) trades on a flat note near the $5,000 psychological level during the early Asian session on Wednesday. Traders are cautious ahead of the US Federal Reserve (Fed) interest rate decision.

Gold price flat lines around $5,000 in Wednesday’s early Asian session.
Escalating tensions in the Middle East could boost Gold, a safe-haven asset.
The rise in energy prices has intensified fears of inflation, which could delay anticipated rate cuts by the Fed.

The war in Iran showed no signs of ending. Israel said it killed Iran’s security chief, Ali Larijani. The development came after Tehran set a massive natural gas field in the United Arab Emirates (UAE) ablaze overnight. US President Donald Trump threatened to expand strikes on Kharg Island, Iran’s main export hub. Rising tensions in the Middle East, specifically involving Iran and the UAE, could boost a traditional safe-haven asset such as yellow metal.

Fears that surging crude oil prices will lead to a rise in inflation have dampened expectations for US interest rate cuts in the near term. This, in turn, could weigh on a non-yielding asset. Goldman Sachs economists predicted rate cuts in September and December, versus June and September previously.

"With higher oil prices comes higher inflation. If we do have higher inflation, central banks are not going to be as motivated as they were six months ago to cut rates, which is a negative for gold prices," said Bob Haberkorn, senior market strategist at RJO Futures.

The Fed is widely expected to hold interest rates steady at its current target range of 3.50% to 3.75% during the March meeting on Wednesday. Traders will take more cues from Fed Chair Jerome Powell’s remarks after the rate decision. Any hawkish comments from Powell could lift the US Dollar (USD) and undermine the USD-denominated commodity price in the near 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.