Gold touches 8-month high as US bonds dip

Gold prices briefly touched an 8-month high on Wednesday, climbing above the $1,877 per ounce resistance, gaining strength ahead of the US inflation print on Thursday. Gold tested the $1,877 per ounce resistance in early trading on Wednesday, but pared gains later in the day, dropping back to $1,870 per ounce. If gold prices continue to increase, further resistance may be encountered near $2,000 per ounce, while if gold prices decline, support may be found near $1,825 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 remained steady on Wednesday, ahead of the US inflation report on Thursday. The dollar index exhibited low volatility, hovering around the 103.3 level. 

US Treasury yields dipped a little strength on Wednesday on reduced Fed rate hike expectations, with the US 10-year bond yielding 3.58%.  

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. Several major Central Banks, such as the Fed, the ECB, and the BOE raised interest rates considerably in the past year. A worldwide wave of fiscal tightening has been driving gold prices down.

Federal Reserve Chairman Jerome Powell stressed on Tuesday that the Fed will have to make tough decisions to bring US inflation down. The Fed Chair, however, carefully avoided commenting directly on the central bank’s monetary policy outlook, turning market attention to the US inflation report later in the week. 

Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have dealt a significant blow to the economy. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.

As the Fed and other central banks start to scale back their aggressive rate hiking, gold prices surge. Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates.

Market participants are anxiously awaiting the US inflation report on Thursday, which may affect gold prices considerably. A softer-than-expected inflation print may trigger a pivot in the Fed’s monetary policy, boosting gold prices.

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Written by:
Myrsini Giannouli

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