Gold trades with positive bias below $4,400; Fed hike bets cap gains ahead of US CPI

Gold (XAU/USD) showed signs of stability below the $4,400 level on Wednesday, pausing a recent decline from the $4,435 region, which had been the highest since June 5. Investors remained cautious as they awaited key U.S. inflation data to gauge the Federal Reserve's future policy stance before making new directional bets on the non-yielding metal.

A weak U.S. Nonfarm Payrolls report on Friday suggested a cooling labor market, potentially dampening the case for an interest rate hike by the Fed. However, concerns about inflation risks due to volatile energy prices persisted, possibly prompting the U.S. central bank to adopt a more hawkish stance. Crude oil prices rose to a one-and-a-half-week high on Tuesday due to Iran's concerns over the Strait of Hormuz and Houthi rebels escalating attacks on vessels in the Red Sea and Bab el-Mandeb.

This led to heightened war-risk premiums, benefiting the safe-haven U.S. Dollar. Analysts at Deutsche Bank noted that the sharp move in energy markets contributed to upward pressure on rates, with the 10-year Treasury yield returning to above 50% ahead of the upcoming CPI report. Gold has long served as a store of value and a medium of exchange, and it is currently viewed as a safe-haven asset amid turbulent times.

Central banks hold the largest portion of gold, diversifying their reserves to bolster their currencies during uncertain periods. In 2022, central banks purchased 1,136 tonnes of gold worth approximately $70 billion, the highest annual purchase since records began. Gold has an inverse relationship with the U.S. Dollar and U.S. Treasuries, which are both major safe-haven assets.

When the Dollar depreciates, gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. The price of gold can be influenced by various factors, including geopolitical instability, recession fears, and fluctuations in the U.S. Dollar. A weaker Dollar usually pushes gold prices higher, while a stronger Dollar tends to keep gold prices in check.