Gold prices rally as end to tightening in sight

Gold prices rallied on Thursday on expectations that the Fed’s tightening cycle is coming to an end. Gold prices gained strength on Thursday, rising above $1,980 per ounce. If gold prices increase, resistance may be encountered near $2,000 per ounce, while if gold prices decline, support may be found near $1,900 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 was shaky on Thursday, with the dollar index trading at the 104.4 level. US treasury yields remained steady on Thursday, with the US 10-year bond yielding approximately 4.45%. 

Inflation in the US eased more than expected in October, driving down rate hike expectations and boosting gold prices. Headline inflation rose by 3.2% year-on-year in October from 3.7% in September, against expectations of a 3.3% print. Monthly CPI remained unchanged from the previous month in October, while markets were anticipating a 0.1% raise. Core CPI, which excludes food and energy, also surprised on the downside. Core CPI increased by 0.2% every month, compared to 0.3% anticipated.

US PPI data released on Wednesday confirmed that price pressures in the US are easing. Monthly PPI shrank by a whopping 0.5% in October, falling below expectations of a 0.1% growth. Core PPI, which excludes food and energy, remained stable, against expectations of a 0.2% growth.

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. At the latest Fed meeting, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. 

Fed Chair Jerome Powell has warned that policymakers are not confident that they have achieved a sufficiently restrictive stance to return inflation to the Fed’s 2.0% target. Powell also stressed that a sustainable drop in inflation is not guaranteed and hinted that stronger economic growth could warrant higher rates.

The crisis in Israel has given rise to a risk aversion sentiment, boosting demand for gold. Gold prices increase in times of war as more traders shy away from riskier assets and invest in assets that are more likely to preserve their value. The crisis in Israel, however, so far remains contained and there seems to be little risk of spreading in the region. Market attention is moving away from the war in Gaza and safe-haven demand is dropping, causing gold prices to drop.

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Written by:
Myrsini Giannouli

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