Gold prices test key resistance

Gold prices rose to an all-time high of 2,150 per ounce on Wednesday, testing this key resistance level. If gold prices increase, further resistance may be encountered at the psychological level of $2,200 per ounce, while if gold prices decline, support may be encountered near $2,025 per ounce. 

Gold prices have experienced a meteoric rise since last week and are currently trading in overbought territory. The dollar’s decline, combined with the rise in demand for safe-haven assets due to the war in Gaza, has propelled gold prices upward. 

Gold prices are propped up by rising geopolitical tensions, which raise 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.

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 plummeted on Wednesday, with the dollar index dropping below 103.3. US treasury yields also declined, with the US 10-year bond yielding approximately 4.10%.  US fundamentals have also influenced gold prices. Last week’s data revealed that the US economy is not as robust as previously anticipated. Rising concerns about the health of the US economy weighed down the dollar and propelled the safe-haven gold upwards. 

US Core PCE Price Index, which is the Fed’s preferred inflation gauge, was at 2.8% year-on-year in January, down from 2.9% in December. Core PCE Price Index data showed that US disinflation is progressing, albeit slowly. Preliminary US GDP data were also underwhelming, putting pressure on the dollar, and boosting gold prices. The US economy expanded by 3.2% in the final quarter of 2023, missing, however, market forecasts of 3.3%.

The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.

Rate cut expectations have been fluctuating strongly, affecting gold prices. Odds of a rate cut in March are practically nil. Rate cut odds in May are also down to 20% from over 80% a few weeks ago. In addition, only 25 basis points of rate cuts are priced in by May, against 25-50 bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly.

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Written by:
Myrsini Giannouli

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