Gold plummets as dollar surges

Gold prices plummeted on Thursday, testing the $2,015 per ounce level support. If gold prices increase, further resistance may be encountered near $2,088 per ounce, while if gold prices decline, further support may be encountered near $2,000 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 surged on Thursday, with the dollar index climbing to the 102.7 level. US treasury yields also gained strength, with the US 10-year bond yielding approximately 4.04%.         

US CPI data on Thursday surprised on the upside boosting the dollar and putting pressure on gold prices. Headline inflation rose by 3.4% year-on-year in December from a 3.1% print in October against the expectation of a 3.2% raise. Monthly CPI rose by 0.3% in December, exceeding expectations of a 0.2% print. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer.

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. Expectations that the Fed may start cutting interest rates from the first quarter of 2024 are propping up gold prices.

The Fed kept interest rates unchanged at its December meeting, within a target range of 5.25% to 5.50%. The Fed’s forward guidance was more dovish than expected, hinting that the central bank is preparing to pivot to a less restrictive monetary policy. Market expectations of future rate cuts are boosting gold prices, as markets are currently pricing in a 25 bp rate cut in March with over 60% probability.

Geopolitical tensions have raised the appeal for safe-haven assets, boosting gold prices. The violence in Gaza is showing no signs of abating. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, propping up 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. Reports that Chinese shipping company Cosco has suspended shipping via the Red Sea propped up gold prices this week, following the announcement of Danish shipping company Maersk that it would not be using Red Sea shipping routes for the foreseeable future.

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Written by:
Myrsini Giannouli

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