On Tuesday morning in the Asian market, the price of gold (gold/US dollar) attracted some sellers to around 2600 US dollars. Traders are waiting for new catalysts, including the outlook for US interest rates and the possibility of tariff policies under the leadership of President elect Donald Trump. The market may be relatively calm before the end of the year.

The cautious stance of the Federal Reserve in the United States may suppress gold prices, as high interest rates often reduce the attractiveness of holding non yield assets. Federal Reserve Chairman Jerome Powell hinted earlier this month that the Fed may be cautious about further rate cuts after cutting interest rates by 25 basis points (bps). The latest economic forecast summary (SEP), also known as the "dot plot," indicates that the Federal Reserve intends to reduce the number of interest rate cuts next year from four to only two, each by 25 basis points.

On the other hand, geopolitical tensions and the possibility of Donald Trump returning to the White House could exacerbate global trade tensions, fuel geopolitical crises, and potentially boost gold prices. Kelvin Wong, Senior Market Analyst for OANDA Asia Pacific, pointed out that "geopolitical tensions have driven gold's rise this year and may continue into 2025, especially with Trump's return to the White House.

Common problems with gold

Why should the market invest in gold?

Gold has played an important role in human history as it is widely used as a store of value and a medium of communication. At present, in addition to its attractive luster and jewelry use, precious metals are widely regarded as safe haven assets, which means that during turbulent times, gold is seen as a good investment. Due to its independence from any specific issuing institution or government, gold is also widely regarded as a tool for hedging against inflation and currency depreciation.

Which institutions purchase the most gold?

The central bank is the largest holder of gold. In order to support the local currency during turbulent times, central banks tend to diversify their reserves and purchase gold to increase the measurable strength of the economy and currency. Large scale gold reserves can become a source of trust for a country's solvency. According to data from the World Gold Council, central banks around the world increased their gold reserves by 1136 tons in 2022, equivalent to approximately $70 billion.

What is the correlation between gold and other assets?

Gold is inversely related to the US dollar and US treasury bond. Gold, US dollar and US treasury bond are major reserves and safe haven assets. When the US dollar depreciates, gold often rises, allowing investors and central banks to diversify asset risks during turbulent times. Gold is inversely proportional to risk assets. The rise of the stock market often suppresses the price of gold, while the emergence of sell offs in high-risk markets often benefits gold.

What factors determine the price of gold?

The price of gold is influenced by various factors. Geopolitical instability or market concerns about a deep economic recession can lead to a rapid rise in gold prices due to its safe haven status. As a zero yield asset, gold tends to rise as interest rates decrease, and rising monetary costs typically drag down gold. However, as gold is priced in US dollars (XAU/USD), most of its movements depend on the performance of the US dollar. A strong US dollar tends to suppress gold prices, while a weak US dollar may push up gold prices.