Gold prices continue to exhibit resilience amidst a complex interplay of economic factors and geopolitical tensions. Despite a modest uptick in the US Dollar (USD) for the third consecutive day, the precious metal remains on track to register gains for the third straight week. The persistent geopolitical risks linked to conflicts in the Middle East and the ongoing Russia-Ukraine war serve as a tailwind for gold, which is priced in dollars (XAU/USD). Meanwhile, investors are closely monitoring potential shifts in monetary policy by the US central bank, anticipating possible reductions in borrowing costs in upcoming meetings.
Gold and Its Relationship with USD and Interest Rates
Gold's value holds an inverse relationship with the US Dollar and US Treasuries, meaning that when the USD strengthens, gold prices typically face downward pressure. Conversely, a weaker dollar tends to push gold prices higher, as witnessed recently. The current scenario is further complicated by the fact that central banks, which are the biggest holders of gold, have been actively increasing their reserves. In 2022 alone, central banks added 1,136 tonnes of gold, valued at approximately $70 billion.
Interest rates also play a crucial role in determining gold prices. Gold generally appreciates when interest rates are lower, as the opportunity cost of holding the non-yielding asset decreases. On the other hand, higher borrowing costs usually weigh down on gold prices. Investors are anticipating potential rate cuts by the US central bank during its monetary policy meetings in June, July, and October 2024. These expectations are likely contributing to the overall support for gold in the current market environment.
Geopolitical Risks and Safe-Haven Demand
Geopolitical tensions have consistently acted as a catalyst for safe-haven demand, benefiting assets like gold and the Japanese Yen. The protracted Russia-Ukraine conflict and ongoing unrest in the Middle East have induced a cautious sentiment among investors, keeping both gold and the Yen afloat. These persistent geopolitical risks have led market participants to seek refuge in assets perceived as safe havens.
The $3,057-3,058 zone has been identified as an immediate hurdle for gold prices. However, a combination of factors, including geopolitical tensions and anticipated monetary policy shifts, might continue to offer some support to gold in overcoming this resistance level. In this context, John Maynard Keynes' insight seems particularly relevant:
"It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction." – John Maynard Keynes
This quote captures the evolving dynamics of the market as investors gradually adapt their strategies in response to changing economic conditions.
Central Banks and Their Impact on Gold
Central banks play a pivotal role in shaping the gold market due to their substantial holdings of the precious metal. Their actions can significantly influence gold prices, as seen with their large purchases in recent years. In 2022, central banks added 1,136 tonnes of gold to their reserves, amounting to around $70 billion. This trend underscores their confidence in gold as a reliable store of value amidst global uncertainties.
The ongoing interplay between central banks' actions and global market dynamics contributes to the current stability in gold prices. While the US Dollar's strength poses challenges for gold, other factors such as central bank purchases and geopolitical risks help maintain its appeal as a safe-haven asset.