Gold struggles to hold onto gains as the US dollar rallies

Gold prices soared as US inflation cooled last week, touching their highest prices since April 2022. On Monday, however, gold prices struggled to hold on to last week’s gains as the dollar started to rally. Gold prices exhibited high volatility on Monday, dropping from $1,935 per ounce to $1,911 per ounce and then recovering most of its losses by the end of the day. 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 in early trading on Monday, but advanced later on, as markets had time to digest last week’s US inflation data. The dollar index dropped to 101.6 early in the day, then rose, climbing above 102. US Treasury yields also rallied on Monday, with the US 10-year bond yielding approximately 3.52%.   

US inflation seems to be 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. 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. 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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Written by:
Myrsini Giannouli

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