Gold Price Forecast: XAU/USD drifts higher above $4,200 on Fed rate cut expectations

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Gold price (XAU/USD) trades in positive territory near $4,205 during the early Asian session on Monday. The precious metal edges higher as markets widely expect the Federal Reserve (Fed) to cut interest rates at its December meeting on Wednesday.

Gold price edges higher to around $4,205 in Monday’s early Asian session.
Traders are pricing in a nearly 90% probability of a Fed rate cut on Wednesday.
The UoM Consumer Sentiment Index increased to 53.3 in December, stronger than expected.

Despite inflation remaining above the Fed's 2% target, recent data showing a cooling labour market has increased the likelihood of a rate cut to stimulate economic activity. The US central bank is anticipated to reduce its key interest rate by a quarter-percentage point on Wednesday amid a cooling labor market. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.

Additionally, central bank demand for Gold might contribute to its upside. The People’s Bank of China (PBoC) added to its gold reserves for a 13th straight month, according to data released on Sunday. Bullion held by the Chinese central bank rose by 30,000 troy ounces last month, bringing the total to around 74.12 million troy ounces.

US consumer sentiment improved in early December, with the index increasing to 53.3 in December from a final reading of 51.0 in November, according to the University of Michigan's Surveys of Consumers. This figure came in stronger than the expectation of 52.0.

The upbeat US economic data could boost the US Dollar (USD) and weigh on the USD-denominated commodity price. It’s worth noting that when the Greenback strengthens, gold becomes more expensive for holders of other currencies, which can decrease demand and undermine the Gold prices.

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.