Gold Price Forecast: XAU/USD holds positive ground above $5,150 ahead of Fed rate decision
Gold price jumps to near $5,160 in Wednesday’s early Asian session. Trump said he was not concerned about the US Dollar's recent drop.The Fed is expected to leave the federal funds rate unchanged at its January meeting on Wednesday.Gold price (XAU/USD) rises to near a fresh record high around $5,160 during the early Asian session on Wednesday. The precious metal extends its upside amid a weaker US Dollar (USD), ongoing geopolitical tensions and economic uncertainty. Traders brace for the Federal Reserve (Fed) interest rate decision later on Wednesday for fresh impetus.
US President Donald Trump said on Tuesday that the value of the USD is great when asked whether he thought it had declined too much. His remarks dragged the US Dollar Index (DXY) lower to its lowest level since February 2022. This, in turn, provides some support to the USD-denominated commodity price, such as Gold.
Additionally, traders seek protection against global instability and trade war threats, boosting the safe-haven demand. Earlier in January, Trump had threatened to take control of Greenland, slap more tariffs on European nations, move to criminally indict Fed Chair Jerome Powell, and oversee an operation to seize the president of Venezuela. On Saturday, he threatened to impose 100% tariffs on Canadian goods if the country were to strike a trade deal with China.
The US central bank is widely anticipated to keep the federal funds rate in its current range of 3.50% to 3.75%. The pause would come after the Fed lowered its benchmark rate at three consecutive meetings late last year. Traders will closely watch Fed Chair Jerome Powell’s remarks at the press conference for more cues regarding future monetary policy. Any hawkish comments from Fed officials could help limit the USD’s losses and weigh on the Gold price in the near term.
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.