Gold bounces off key support as the dollar soars

Gold prices plummeted on Thursday, touching the key $1,900 per ounce support as US inflation surprised again on the upside. Gold prices pared losses later in the day, climbing back to$1,912 per ounce. If gold prices increase, resistance may be encountered near $1,930 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 soared on Thursday as US inflation continued to rise, and the dollar index was catapulted to 105.2. US Treasury yields were stable, with the US 10-year bond yield climbing above 4.28%.   

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 U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. 

The Fed’s aggressively hawkish policy over the past year has been paying off and inflationary pressures in the US are easing. Cooling US inflation rates have shifted market expectations towards a less hawkish direction. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently. 

Hotter-than-expected US inflation data this week has pushed gold prices down. PPI data on Thursday confirmed that inflationary pressures are not easing just yet, despite the Fed’s high interest rates. PPI rose by 0.7% in August, exceeding expectations of a 0.4% raise. Core PPI, which excludes food and energy, decelerated a little, rising by 0.2% in August compared to a 0.4% growth in July. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US. 

Consumer inflation is also accelerating, with CPI rising by 0.3% in August from 0.2% in July against expectations of a 0.2% print. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Core inflation, which excludes food and energy, also rose by 0.3% in August from 0.2% in July. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.

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Written by:
Myrsini Giannouli

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