Gold buoyed by haven demand

Gold prices edged higher on Wednesday, touching the $1,985 per ounce level. The dollar gained strength on Wednesday, but gold prices were buoyed further by demand for haven assets. If gold prices increase, resistance may be encountered near $2,000 per ounce, while if gold prices decline, support may be found near $1,900 per ounce. 

The crisis in Israel has given rise to a risk aversion sentiment, boosting demand for gold. Fears of the Israeli war spreading to the Middle East are increasing the appeal of haven assets such as gold. Fears of regional escalation into Iran are boosting gold prices. Gold prices increase in times of war as more traders shy away from riskier assets and invest in assets that are more likely to preserve their value. Hopes of a diplomatic de-escalation to the crisis had put pressure on gold prices in the past few days. On Wednesday, however, the crisis intensified again, propping up gold prices.

Risk sentiment is improving, however, despite the continued crisis in Israel. The US Federal Reserve has hinted that it has reached its rate ceiling, boosting the economic world economic outlook. Market expectations that US interest rates have peaked are raising the comparative appeal of gold against the dollar as a haven asset.

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar edged higher on Monday and the dollar index touched the 106.6 level. US bond yields also gained strength, with the US 10-year bond yielding approximately 4.96%.              

Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. FOMC members kept interest rates unchanged at a target range of 5.25% to 5.50% at the Fed’s September meeting. The Federal Reserve paused rate hikes at its latest meeting but is likely to keep interest rates at high levels for longer to bring inflation down. 

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Written by:
Myrsini Giannouli

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