Gold tumbles to eight-month low below $4,000 as Middle East tensions reinforce US rate hike bets

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Gold price (XAU/USD) falls to near an eight-month low around $3,975 during the early Asian session on Friday. The precious metal extends its downside as rising tensions in the Middle East raise inflation concerns and reinforce expectations of elevated US interest rates.

Gold price slumps to near $3,975 in Friday’s early Asian session.
Iran tells Houthis to close Red Sea gateway if US hits power network.
Escalating Middle East conflict fueled concerns that the Fed could hike interest rates this year.

Reuters reported on Thursday that Iran has asked Yemen’s Houthi movement to stand ready to close the Red Sea oil route if the US strikes Iranian power infrastructure, posing a potent new threat to global energy supplies. This action came after US President Donald Trump’s threat to attack Iran's power infrastructure on Tuesday.

Any threat to the Red Sea risks hugely exacerbating the global energy crisis triggered by Iran's closure of the Strait of Hormuz and underscores the explosive risks stemming from a new round of warfare. This, in turn, could push crude oil prices up and could prompt central banks to hold rates at elevated levels for longer, weighing on gold's appeal as a non-yielding asset.

The developments surrounding Middle East conflicts overshadow recent optimism over easing inflation. Data released on Tuesday showed that US Consumer Price Index (CPI) inflation slowed in June, while data from Wednesday showed a decline in the Producer Price ‌Index (PPI).

Traders are now pricing ‌in nearly a 55% odds that the Federal Reserve (Fed) will hike rates in September, according to the CME FedWatch Tool.

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.