Gold prices surge on US debt default worries

Gold prices surged on Tuesday ahead of Wednesday’s Fed meeting, testing the $2,015 per ounce resistance. If gold prices increase, further resistance may be encountered near $2,075 per ounce, while if gold prices decline, support may be found near $1,970 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. Increased risk aversion sentiment on Tuesday, combined with the dollar’s decline, boosted gold prices. US Treasury Secretary Janet Yellen in a letter to the US Congress warned that the office would not meet all US government obligations by June 1. Mounting fears of a US debt default drove gold prices up on Tuesday.

The dollar edged lower on Tuesday ahead of Wednesday’s Fed policy meeting, with the dollar index dropping to the 101.9 level. US Treasury yields declined, with the US 10-year bond yielding approximately 3.43%. 

The Federal Reserve raised interest rates by only 25 basis points at its meeting in March, bringing the benchmark interest rate to a target range of 4.75% to 5.00%. This week, the market will focus primarily on the Fed’s monetary policy decision. Policymakers are expected to raise interest rates by 25 basis points at Wednesday’s meeting. Traders will focus mostly on the FOMC statement and press conference for forward guidance. 

Markets are anticipating a pause in rate hikes after this last interest raise and there is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures. 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. 

The recent crisis in the banking sector caused risk sentiment to plummet, raising the appeal of safe-haven assets. Renewed concerns about a banking sector meltdown provide support for gold prices. First Republic Bank announced last week that its deposits fell 40% in the first quarter of this year, and the bank’s stock went into freefall. First Republic collapsed on Monday but was bought by JPMorgan after US regulators invited other banking institutions to step in. 

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Written by:
Myrsini Giannouli

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