Gold loses ground to near $4,100 as inflation concerns, Fed rate hike bets build

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Gold price (XAU/USD) loses momentum to around $4,100 during the early Asian session on Wednesday. The precious metal extends the decline as traders cement views on the US Federal Reserve (Fed) hiking interest rates this year.

Gold price declines to near $4,100 in Wednesday’s early Asian session.
Concerns about lingering inflation tend to weigh ‌on the precious metal.
Futures traders have priced in that the Fed is likely to hike rates by the end of this year.

Gold has faced some selling pressure since the outbreak of the US-Iran war on February 28. The recent agreement between Washington and Tehran has eased pressure on energy prices, but the inflationary impact may linger, leading to solidified market views on the Fed raising rates this year to tackle elevated costs.

Also, an unexpectedly hawkish Fed meeting chaired by Kevin Warsh last week boosted expectations for a year-end interest rate hike, contributing to the yellow metal’s downside. It’s worth noting that Gold is often used as a hedge against inflation but does not yield interest, making it less attractive when interest rates are high.

Traders are now pricing in nearly an 86.1% chance of a Fed hike in December, up from 61% before last week’s FOMC meeting, according to the CME FedWatch tool.

“Fed repricing, together with resilient US macro data, has played the primary role in pushing gold lower,” said Deutsche Bank AG analyst Michael Hsueh. The bank cut its price forecast to $4,300 for the third quarter (Q3), down by more than a fifth from the prior outlook and to $4,800 for the final three months of the year.

The US Personal Consumption Expenditures (PCE) Price Index (PCE) data for May will be in the spotlight later on Thursday. This report could offers some hints about the US interest rate path this year.

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.