XAU/USD remains below $2,650 due to US Dollar recovery

Gold has played a key role in human history as it has been widely used as a store of value and medium of exchange. Aside from its luster and use in jewelry, the precious metal is currently widely viewed as a safe haven, meaning it’s considered a good investment during turbulent times. Gold is also widely viewed as a hedge against inflation and currency devaluations because it is not dependent on a specific issuer or government.

Central banks are the largest owners of gold. In their aim to support their currencies during turbulent times, central banks tend to diversify their reserves and purchase gold to improve the perceived strength of the economy and the currency. Large gold reserves can be a source of confidence in a country’s solvency. Central banks increased their reserves by 1,136 tons of gold in 2022, worth around $70 billion, according to data from the World Gold Council. This is the highest annual purchase on record. Central banks from emerging markets such as China, India and Turkey are rapidly increasing their gold reserves.

Gold has an inverse correlation with the US dollar and US Treasury bonds, which represent both important reserves and safe havens. When the dollar depreciates, gold prices tend to rise, allowing investors and central banks to diversify their assets during turbulent times. Gold is also inversely correlated with risk assets. A stock market rally tends to weaken gold prices, while selloffs in riskier markets tend to favor the precious metal.

The price may fluctuate based on a variety of factors. Geopolitical instability or fear of a deep recession can quickly lead to an escalation in gold prices due to its safe haven status. As a non-yielding asset, gold tends to rise when interest rates are lower, while higher money costs usually weigh on the yellow metal. Still, most of the moves depend on how the US dollar (USD) behaves when the asset is valued in dollars (XAU/USD). A strong dollar tends to keep gold prices in check, whereas a weaker dollar is likely to push gold prices higher.