Gold continued trading near a nine-month low on Monday, trading as low as $1,733 per ounce, as the dollar climbed to a fresh 20-year high. If gold price declines further, support may be found at $1,675 per ounce, while resistance may be found at around 1,870 per ounce and higher up at $1,920 per ounce.
The dollar climbed to fresh 20-year highs on Monday, with the dollar index rising above the 108 level. US Bond yields retreated a little on Monday, with the US 10-year treasury note yielding approximately 3%. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.
Rising global recession fears have sparked a risk-aversion sentiment, boosting safe-haven assets. The dollar’s impressive rally, however, is weighing down competing currencies, such as gold. At the beginning of the year, the global economy was on the road to recovery from the effects of the pandemic. The war in Ukraine however, has set economic growth back, with prices of energy and food rising and inflation reaching peak levels, crippling economic growth. Even though recession fears traditionally provide support for safe-haven assets, the gold price is retreating, as interest rate assets become a comparatively more appealing choice.
Increased rate hike expectations also dampen the appeal of gold. Major Central Banks, including the Fed and the BOE, aim to tighten their fiscal policies further this year to rein in inflation. The Fed has been signaling a strong rate hike again this month, which is also supported by signs of economic recovery in the US. Another rate hike of 75 base points is expected for July and is already been priced in by markets, catapulting the dollar to record highs and pushing gold price down.
High inflation rates are also known to support the price of gold, which is often used as an inflation hedge and, with global inflationary pressures increasing, the gold price is boosted. High inflation, however, is a two-edged sword for the price of gold, as it increases the chances of Central Banks raising their interest rates, which reduces the appeal of gold.
This week, gold prices are likely to be driven by signs of strong rate hikes from major Central Banks and especially the Fed. As markets have already priced in a steep interest rate hike this month in the US, hawkish Fed rhetoric may need to continue with renewed vigor to boost the dollar further. Important US inflation CPI and PPI indicators, scheduled to be released on the 13th and 14th respectively, may also affect the gold price.
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