Gold prices remain weak despite the dollar’s decline

Gold prices have been declining as the US dollar and yields surged. Gold’s slide was arrested this week and gold prices traded sideways on Thursday, oscillating around the $1,820 per ounce level. If gold prices increase, resistance may be encountered near $1,930 per ounce, while if gold prices decline, further support may be found near $1,800 per ounce. 

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 continued to decline on Thursday, with the dollar index dropping from a yearly high of 107.3 earlier in the week to 106.4. US bond yields also eased, with the US 10-year bond yield climbing down from a 16-year high of 4.86% to 4.71%. Rising US yields and increased rate hike expectations have bolstered the dollar in the past few days. The dollar, however, has been in overbought territory and has been retreating for the past couple of days.         

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 voted last week to keep interest rates unchanged at a target range of 5.25% to 5.50%. 

The Federal Reserve decided to pause rate hikes at its latest meeting, but that does not necessarily mean it has reached its rate ceiling. The Fed is likely to keep interest rates at high levels for longer to bring inflation down. At the same time, other major central banks are maintaining high-interest rates. Gold prices are tumbling since gold presents a less attractive option as an investment than interest-yielding treasury bonds.

Core PCE Price Index, the Fed’s preferred inflation gauge, indicated last week that price pressures in the US are cooling. The core PCE Price Index dropped to 3.9% year-on-year from 4.3% in July, increasing the odds of a pause in rate hikes in November. Headline inflation came in hotter than anticipated though, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Inflationary pressures in the US remain high, despite the Fed’s high interest rates.

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Written by:
Myrsini Giannouli

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