Gold tumbles below $4,700, Iran’s Hormuz Strait proposal and Fed rate decision in focus

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Gold price (XAU/USD) slumps to near $4,685 during the early Asian session on Tuesday. Markets turn to "wait-and-see" mode ahead of the US Federal Reserve (Fed) interest rate decision and shifting developments in the Middle East conflict.

Gold price falls to around $4,685 in Tuesday’s early Asian session.
Fed is likely to hold rates steady at its April meeting on Wednesday.
Trump discussed Iran’s proposal with top aides.

The Federal Open Market Committee (FOMC) is expected to hold its benchmark overnight interest rate steady in the 3.50%-3.75% range, where it has been since December. Traders will closely monitor Jerome Powell’s press conference after the policy meeting, as it might offer some hints about potential rate hikes later this year. Any hawkish remarks from Fed officials could lift the US Dollar (USD) and weigh on the USD-denominated commodity price.

The question of whether Powell will continue to serve on the Fed's Board of Governors even if Warsh is confirmed in time to run the next policy meeting in June also could be addressed.

Ongoing US-Iran tensions and the closure of the Strait of Hormuz have boosted crude oil prices, which have fueled inflation fears and raised the bar for cutting rates. Gold is often used amid geopolitical uncertainty but does not yield interest, making it less attractive when interest rates are high.

CNBC reported on Monday that US President Donald Trump and his national security team discussed Iran’s proposal to reopen the Strait of Hormuz if the US lifts its blockade and the war ends. The proposal would postpone negotiations on Tehran’s nuclear ambitions for a later date. Nonetheless, it remains unclear if Trump will entertain the offer to end the two-month-old war.

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.