Gold prices touched a fresh nine-month high on Tuesday, as the US dollar and bond yields weakened. Gold prices rose to $1,942 per ounce on Tuesday, before paring some of their gains. If gold prices continue to increase, 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 slipped on Tuesday as markets weighed Fed rate hike expectations. The dollar index remained below the 102 level most of the day, boosted briefly by robust US economic activity data. US Treasury yields dipped on Tuesday, with the US 10-year bond yielding approximately 3.47%.
US inflation is cooling, driving the dollar down and propelling gold prices upwards. US PPI data last week fell below expectations, declining by 0.5% in December, versus estimates of a 0.1% drop. US headline inflation also dropped to 6.5% year-on-year in December from 7.1% in November. Cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases, boosting gold prices.
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. Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking.
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. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices. Gold prices are approaching overbought territory though, as they trade close to levels reached only after the crisis in Ukraine started last year.
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