Gold price is facing downward pressure and currently trading near $2,405 in Monday’s early Asian session. The unexpected acceleration of the US Producer Price Index (PPI) in June has contributed to this decline. Despite this, there are rising expectations of Fed rate cuts which could potentially limit the downside of the precious metal. Investors are keeping an eye on important economic data such as the Chinese Gross Domestic Product (GDP) for the second quarter, the US NY Empire State Manufacturing Index for July, and a speech by the Federal Reserve’s Mary Daly scheduled for later in the day.
The Bureau of Labor Statistics released data showing that the US PPI increased to 2.6% year-over-year in June, surpassing expectations. Additionally, the monthly PPI rose by 0.2% in June, higher than anticipated. This unexpected increase in inflation could be a contributing factor to the decline in Gold prices. However, with the market expecting the Fed to begin cutting interest rates in September, the downside for Gold may be limited. A lower interest rate typically makes Gold more attractive as an investment due to its non-interest-bearing nature.
Market sentiment is currently leaning towards a 25 basis points cut by the Fed in September, with a close to 80% probability according to the CME Fedwatch Tool. Furthermore, ongoing global political uncertainty and geopolitical tensions in the Middle East could lead to a boost in safe-haven flows, benefiting precious metals like Gold. Recent events, such as an alleged assassination attempt on former President Donald Trump during a rally in Pennsylvania, further add to the uncertainties in the political landscape, potentially driving investors towards safe-haven assets like Gold.
Gold has held significant historical importance as a store of value and medium of exchange. In addition to its use in jewelry, it is now widely considered a safe-haven asset, particularly during turbulent times. Gold also acts as a hedge against inflation and depreciating currencies, as it is not reliant on any specific issuer or government. Central banks are major holders of Gold, often increasing reserves during times of economic instability to bolster the perceived strength of their currencies. Emerging economies such as China, India, and Turkey have been rapidly increasing their Gold reserves as well.
There is an inverse correlation between Gold and the US Dollar and US Treasuries, both major reserve and safe-haven assets. When the Dollar weakens, Gold tends to rise, providing investors with a diversification option during uncertain times. Gold is also negatively correlated with risk assets, with a rise in stock markets usually leading to a decrease in Gold prices. Various factors, such as geopolitical instability and economic concerns, can cause Gold prices to fluctuate. The performance of the US Dollar also plays a crucial role, as the price of Gold is denominated in dollars. A stronger Dollar typically suppresses Gold prices, while a weaker Dollar tends to push prices higher.
