Gold prices skyrocket as the dollar crashes

Gold prices soared on Tuesday, climbing above the $1,675 per ounce resistance level, touching $1,717 per ounce. If gold prices decline, support may be found near $1,616 per ounce and further down at the 2020 low near $1,441 per ounce. Resistance may be found at around $1,729 per ounce.

Gold prices benefitted from the dollar’s decline on Tuesday, as US voters decided which party will control Congress. The dollar plummeted on Tuesday, with the dollar index dropping below 109.4. US Treasury yields also declined, although not as sharply as the dollar, retaining support from last week’s Fed rate hike. The US 10-year bond yield dropped from 4.20% to 4.15% on Tuesday, while the US 2-year bond yield fell from its 15-year high of 4.74% to below 4.66%.

The dollar has been trading in overbought territory and has been slipping since last week in anticipation of Tuesday’s US elections. The USD was boosted by the Fed’s rate hike but weak jobs data pushed the dollar down last week and the dollar’s sell-off continued this week. 

The US mid-term Congressional elections have been taking place on Tuesday and their outcome is as yet uncertain. So far, the election results are close, but US high inflation and fuel costs have weighed the Democratic party down. Concerns that the Democratic party might lose control of Congress in Tuesday’s elections, leading to political instability in the US, have pushed the dollar down. If the ruling party loses control of Congress, it will not be able to push forward its agenda.

Gold prices are under pressure by the shift of most major Central Banks towards a tighter monetary policy to combat rising inflation rates. Assets yielding interest become a more appealing investment compared to gold as interest rates rise. 

The US Federal Reserve voted to increase interest rates by 75 basis points at its monetary policy meeting last week. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate in a range of 3.75% to 4.0%. The FOMC Statement issued by the Fed contained a subtle change in forward guidance. The tone of the statement was more cautious than before, indicating that the Fed may be pondering slowing the pace of rate hikes. Market expectations are currently in favor of a 50-bps rate hike in December and a 25-bps hike in January. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.

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Written by:
Myrsini Giannouli

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