Gold price (XAU/USD) extends the rally to around $4,195 during the early Asian session on Thursday. The precious metal rises to the highest level since October 21 ahead of the vote to end the US government shutdown, which would offer economic clarity and set the stage for the Federal Reserve’s (Fed) next move. Fed officials are set to speak later in the day, including Neel Kashkari, Alberto Musalem and Beth Hammack.
The US House of Representatives is in session to debate and vote on the Senate-passed funding deal that would end the longest government shutdown in US history. The Senate has already approved the spending package, backed by a group of Democrats. The bill will restore funding to government agencies through January 30.
Hopes for the end of the US government shutdown and the resumption of economic data could lead the US central bank to cut interest rates next month, according to Reuters. This, in turn, could provide some support to the yellow metal. The markets are now pricing in nearly a 64% possibility that the Federal Reserve (Fed) will cut rates in December, according to the CME FedWatch tool. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
Fed policymakers are divided on rate reductions amid inflation concerns. Fed Governor Stephen Miran described US monetary policy as too tight, mainly because he believes cooling housing inflation is easing price pressures.
Meanwhile, Atlanta Fed President Raphael Bostic said on Wednesday that he favors leaving interest rates where they are until there is “clear evidence” that inflation is moving back to the Fed’s 2% target. Bostic announced he will step down as president of the Federal Reserve Bank of Atlanta early next year.
Traders will take more cues from the Fedspeak later on Thursday. Any hawkish remarks from Fed officials could lift the US Dollar (USD) and drag the USD-denominated commodity price lower in the near term.
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.