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The dollar rally undermines gold’s appeal

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Written by:
Myrsini Giannouli

07 July 2022
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Gold price plummeted on Wednesday, breaking through the $1,752 per ounce support level and falling as low as $1,732 per ounce. 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.

This week, 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. 

The dollar was catapulted to a fresh 20-year high on Wednesday, with the dollar index climbing above the 107 level. US Bond yields also rallied on Wednesday, with the US 10-year treasury note yielding approximately 2.9%. Real yields compete directly with gold, a non-interest-bearing asset, and their rise puts pressure on the price of gold. 

A strong dollar and US bond yields have been putting pressure on gold prices in the past few weeks, while increased rate hike expectations dampen gold's appeal. Major Central Banks, including the Fed and the BOE, aim to tighten their fiscal policies further this year to rein in inflation. 

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.

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.

XAUUSD 1hr chart

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Written by:
Myrsini Giannouli

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