Why is the Gold price rebounding amid easing US-Iran tensions?

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Gold price (XAU/USD) trades in positive territory near $4,240 during the early European session on Friday. The precious metal rebounds from a six-month low after US President Donald Trump said he canceled planned military strikes against Iran, fueling hopes that a US-Iran truce deal is close.

Gold price recovers to near $4,240 in Friday’s early Asian session.
Trump said he canceled planned military strikes against Iran, fueling hopes for a US-Iran peace deal.
Concerns over higher inflation and US interest rates might cap the upside of gold.

The BBC reported on Thursday that Trump said he had called off Iran strikes, saying negotiations with Tehran were "brought to the highest level of Iranian leadership and approved.” Nonetheless, Iran stated that a deal Tehran“has not yet reached a final conclusion regarding an agreement.”

Hopes for a diplomatic way out of the war that has rattled global markets drag the US Treasury yields and the US Dollar (USD) lower, supporting the USD-denominated commodity price.

“Gold is clearly significantly oversold just now, and it remains to be seen whether this is a recovery as such or simply short positions taking profit,” independent analyst Ross Norman said.

The upside for the yellow metal might be limited as elevated crude oil prices can accelerate inflation and keep interest rates higher for longer. 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.

The Federal Reserve (Fed) is expected to leave rates unchanged in Kevin Warsh’s first meeting as Fed chair next week. Traders are now pricing nearly a 67% probability of a US rate hike in December, 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.