Gold price (XAU/USD) holds positive ground around $5,405 during the early Asian session on Friday. The precious metal hit a record high near $5,600 before paring gains due to profit-taking in the previous session. Traders will closely monitor the developments surrounding President Donald Trump’s pick for the new Federal Reserve (Fed) Chair. The US Producer Price Index (PPI) report is due later on Friday.
Bloomberg reported late Thursday that Trump will announce his choice to replace Jerome Powell as the chair of the Fed on Friday morning. Trump said that his pick will do a “good job” and reiterated his expectation that the central bank’s new leader will lower interest rates.
A more dovish chair would increase bets on further interest-rate cuts this year, which could lift the Gold price. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
Geopolitical uncertainty could boost traditional safe-haven assets such as Gold. Trump on Wednesday urged Iran to “come to the table” and negotiate a “fair and equitable deal,” or the next US attack would be far worse. Iran responded with a threat to strike back against the US, Israel, and those who support them.
On the other hand, traders might book some profits in the near term as the yellow metal has surged nearly 100% over the last 12 months. “We are seeing a dramatic sell-off after precious metals made new recent all-time highs,” said David Meger, director of metals trading at High Ridge Futures.
Gold FAQs
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.
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.
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.
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.
