Gold recovers as dollar softens

Gold prices reached a 13-week low of $1,799 per ounce last week, pushed down by the strong dollar and US yields. On Monday however, gold prices recovered, reaching $1,823 per ounce, as the dollar weakened. If the price of gold decreases, further support may be found at $1,782 per ounce, while resistance may be found at around 1,920 per ounce and higher up at $2,000 per ounce.

The price of gold has been driven by conflicting market forces and balances between increased risk-aversion and rising yields. Gold is supported by increased risk-aversion sentiment but is undermined by increasingly hawkish Fed policy, which boosts the dollar and real yields against competing assets. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.

Inflationary pressures are known to support the price of gold, which is often used as an inflation hedge. As US inflation rises though, the USD and US yields grow stronger, pushing the price of gold down.

The dollar pared some of its gains on Monday though, with the dollar index falling to 104.2, pushed down by disappointing economic data. The USD, which has been moving into overbought territory, softened on Monday, while US yields also withdrew, with the US 10-year treasury note yielding close to 2.85%. Gold prices moved up on Monday, taking advantage of the weakening dollar.

Gold’s safe-haven status supports its price, as the ongoing crisis between Russia and Ukraine drives investors away from riskier assets as global economic growth is stalled. Geopolitical tensions have propelled gold prices close to an all-time high of $2,075 per ounce earlier in the year. 

Even though the war continues without an end in sight, gold has been overbought in the past few months and its potency as a safe-haven asset is beginning to wan. Even though risk-aversion drives investors towards safe-haven assets, the dollar has been surpassing other assets in popularity, decreasing the appeal of gold.

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Written by:
Myrsini Giannouli

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