Gold soars on geopolitical concerns

Gold soared on Wednesday, benefiting from the dollar’s weakness, testing the $2,077 per ounce level resistance. If gold prices increase, further resistance may be encountered near the all-time high of $2,100 per ounce, while if gold prices decline, support may be encountered near $2,051 per ounce. 

Rising geopolitical tensions have raised the appeal for safe haven assets, boosting gold prices. The violence in Gaza is showing no signs of abating. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe haven assets, propping up gold prices.  The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area. Fresh attacks on ships in the Red Sea area by Yemen's Iran-backed Houthi militia increased concerns that the crisis will widen to other areas in the region.

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 plummeted on Wednesday, sinking to its lowest level since July, with the dollar index dropping below the 101.0 level. US treasury yields also dipped, with the US 10-year bond yielding approximately 3.79%. 

US Final GDP for Q3 of 2023 was revised lower, boosting gold prices in expectations that low economic growth may induce the Federal Reserve to pivot to a less restrictive monetary policy. Preliminary GDP indicated that the US economy expanded by 5.2% in the third quarter of 2023, but the final print was revised lower to 4.9%. 

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. Expectations that the Fed may start cutting interest rates from the first quarter of 2024 are propping up gold prices.

The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts are boosting gold prices, as markets are currently pricing in a 25 bp rate cut in March with over 70% probability.

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Written by:
Myrsini Giannouli

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