Gold surges as Middle East tensions rise

Gold prices surged on Monday, rising to the $2,037 per ounce level. If gold prices increase, resistance may be encountered near $2,040 per ounce, while if gold prices decline, support may be encountered near $2,000 per ounce. 

Rising geopolitical tensions propped up gold prices, which raised the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area. 

Attacks on ships in the Red Sea area by Yemen's Iran-backed Houthi militia increase concerns that the crisis will widen to other areas in the region. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. A deadly drone attack against US forces over the weekend intensified tensions in the Middle East, boosting gold prices. The US has accused Iran of being behind the attack and has threatened to retaliate, although the Iranian government denies any involvement in the drone attacks. 

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 gained strength on Monday, with the dollar index touching the 103.8 level. US treasury yields edged lower, however, with the US 10-year bond yielding approximately 4.08%.                

This week, gold prices are expected to depend largely on the Fed’s forward guidance after the monetary policy meeting on the 31st.  The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The US central bank is expected to leave interest rates unchanged again this week. 

Fed Chair Jerome Powell’s press conference after the meeting will attract much attention as traders will focus on the central bank’s forward guidance. Market expectations of future rate cuts fluctuate strongly and are one of the primary drivers of the dollar, as well as of gold prices. Central banks’ interest rates affect gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. 

If the Fed removes the tightening bias from its policy statement, markets will interpret this as a sign that the central bank is ready to pivot, which will weaken the dollar, boosting gold prices. If, on the other hand, the central bank retains a hawkish stance, we expect to see the US dollar and treasury yields go up and gold prices drop.

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Written by:
Myrsini Giannouli

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