Gold Price Forecast: XAU/USD holds steady above $2,500, potential downside seems limited

Gold Price trades flat near $2,500 in Tuesday’s early Asian session.
Fed’s dovish remarks and rate-cut bets underpin the Gold price.
Easing geopolitical risks in the Middle East might cap the upside for XAU/USD.

Gold Price (XAU/USD) hovers around $2,500 during the early Asian session on Tuesday. The rising expectation of the interest rate cut by the Federal Reserve (Fed) in September and further US dollar weakness are likely to underpin the precious metal in the near term. Fed Chair Jerome Powell’s speech at Jackson Hole will take center stage on Friday.

The yellow metal reached a new all-time high of $2,509 on Friday, and the more dovish comments from the Fed officials this week might lift the Gold price as lower interest rates generally reduce the opportunity cost of holding non-yielding bullion. Chicago Fed President Austan Goolsbee stated that the US economy does not show signs of overheating, so Fed policymakers should be cautious about keeping restrictive policy in place longer than necessary.

Meanwhile, Minneapolis Fed President Neel Kashkari said on Monday that it was appropriate to discuss potential US interest rates cut in September due to concerns about the weakening labor market.

Traders will take more cues from the Fedspeak on Tuesday, with the Fed’s Raphael Bostic and Michael Barr set to speak. On Friday, Fed Chair Powell's speech at the Jackson Hole symposium might offer some hints about the path forward for interest rates.

On the other hand, easing geopolitical risks and risk-on sentiment could cap the upside for Gold. The United States said that Israeli Prime Minister Benjamin Netanyahu has accepted a bridging proposal aimed at resolving differences between Israel and Hamas. A de-escalation of tensions in the Middle East would most likely result in the geopolitical risk premium disappearing rapidly.

Gold FAQs

Why do people invest in Gold?

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.

Who buys the most Gold?

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.

How is Gold correlated with other assets?

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.

What does the price of Gold depend on?

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.

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