Introduction to Gold Prices
The price of gold has been on the rise, reaching around $3,590 in the early Asian session on Monday. This increase is attributed to the weak jobs data in the US, which has fueled expectations of a Federal Reserve (Fed) rate cut later this month. The US Nonfarm Payrolls (NFP) report showed a slowdown in hiring in August, while the Unemployment Rate rose to its highest level since 2021, confirming that labor market conditions in the world’s biggest economy are slumping.
Factors Influencing Gold Prices
Weak jobs data has cemented expectations for a US Federal Reserve (Fed) rate cut, which provides some support to the precious metal price. Lower interest rates could reduce the opportunity cost of holding gold. Traders are now almost certain that the Fed will lower rates at its upcoming meeting on September 17, with an 84% chance of it being a 25 basis points (bps) cut and a 16% possibility of a more aggressive 50 bps reduction. Additionally, rising demand from major central banks contributes to the upside. Official data showed that the People’s Bank of China (PBoC) added gold to its reserves in August, extending purchases of bullion into a 10th straight month.
Central Banks and Gold Reserves
Central banks are the biggest gold holders. They 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. The People’s Bank of China (PBoC) added gold to its reserves in August, with China’s gold reserves standing at 74.02 million fine troy ounces at the end of August, up from 73.96 million at the end of July. Central banks from emerging economies such as China, India, and Turkey are quickly increasing their gold reserves.
Gold as a Safe-Haven Asset
Gold has played a key role in human 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. Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets.
Conclusion
In conclusion, the price of gold is influenced by a wide range of factors, including geopolitical instability, fears of a deep recession, and interest rates. The recent increase in gold prices is attributed to the weak jobs data in the US and the expectation of a Fed rate cut. As central banks continue to increase their gold reserves, the demand for gold is likely to remain high. With its safe-haven status and inverse correlation with the US Dollar, gold is likely to remain a popular investment option during turbulent times. Traders will be keeping a close eye on the upcoming US Producer Price Index (PPI) report, which could impact the price of gold.
