Gold prices defy the dollar’s rally

Gold prices edged higher on Wednesday, rising to $2,670 per ounce even as the rivaling dollar gained strength. If gold prices rise, they may encounter resistance at $2,690 per ounce, while if gold prices decline, support may be encountered near $2,596 per ounce. 

Gold prices are driven by opposing forces. Increased safe-haven demand due to geopolitical tensions is driving gold prices up. In addition, the recent uncertainty surrounding President-elect Donald Trump’s proposed trade tariffs is driving investors towards safe assets. On the other hand, however, the Fed’s recent hawkish shift is putting pressure on gold prices. 

This week's reports that Trump’s tariffs will be more moderate than previously anticipated have caused turmoil in markets. According to the Washington Post, Trump is considering imposing international tariffs that are only related to sectors deemed critical to national or economic security. Trump, however, later denied these rumors, stating that the claims by the Washington Post were completely false.

The uncertainty surrounding Trump’s proposed tariffs rose even more on Wednesday after CNN reported that the incoming US President is considering declaring a national economic emergency to provide legal justification for the new tariffs. The news agency cited four unidentified sources familiar with the matter. According to the CNN article, the declaration of a national emergency would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act, known as IEEPA. Gold prices rose after the release of the CNN article, as Trump’s risky economic plans boosted demand for safe-haven assets. 

On Tuesday, the Chinese central bank reported an increase in its gold reserves by 10 tons in December. The Chinese central bank raised its gold reserves for the second month in a row in December, boosting gold prices.

Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar surged on Wednesday and the dollar index rose from 108.8 to 109.1. US treasury yields edged higher on reduced Fed rate cut expectations, with the US 10-year bond yielding 4.70%. Gold prices have been defying the rise in the US dollar this week, however, as safe-haven demand is boosting both those typically rivaling assets.        

Gold prices are supported by increased Fed rate cut expectations. The US Federal Reserve cut interest rates by 25 basis points at its latest meeting to a target range of 4.25% to 4.50%. Fed Chair Jerome Powell delivered a hawkish speech after the meeting, emphasizing the need to be cautious about further rate cuts. Powell stated that the Fed’s approach will remain data-driven and hinted that the pace of future rate cuts will be slower. 

In addition, the Fed’s updated dot plot was more hawkish than anticipated, bringing down expectations of future rate cuts. The Fed’s latest dot plot indicated that only two rate cuts will take place in 2025, down from four projected in September. 

Safe-haven demand remains high, due to uncertainty in the Middle East, boosting gold prices. The civil war in Syria has been rekindled, further destabilizing the region. Tensions between Israel and Lebanon have cooled after the ceasefire deal, but hostilities between Israel and Hamas continue in the Gaza area. Meanwhile, the situation between Russia and Ukraine remains critical.

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Written by:
Myrsini Giannouli

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