Gold plummets as the dollar rallies

Gold prices plummeted on Tuesday dropping to $1,984 per ounce. If gold prices increase, resistance may be encountered near $2,010 per ounce, while if gold prices decline, support may be found near $1,950 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 Tuesday, ahead of Wednesday’s Fed rate decision, with the dollar index climbing to the 106.7 level. US bond yields also rallied, with the US 10-year bond yielding approximately 4.93%.                  

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. Several major Central Banks are meeting this week, starting with the BOJ on October 31st, then the Fed on November 1st, and finally the BOE on November 2nd. The BOJ’s dovish outlook on Tuesday failed to provide support for gold prices, as markets await Wednesday’s Fed rate decision.

FOMC members kept interest rates unchanged at a target range of 5.25% to 5.50% at the Fed’s September meeting. The Federal Reserve paused rate hikes at its latest meeting but is likely to keep interest rates at high levels for longer to bring inflation down. 

Markets expect the Fed to hold rates steady this week, after FOMC members’ dovish comments in the past couple of weeks, and market participants will focus mostly on the Fed’s forward guidance.

The crisis in Israel has given rise to a risk aversion sentiment, boosting demand for gold. Fears of the Israeli war spreading to the Middle East are increasing the appeal of haven assets such as gold. Fears of regional escalation into Iran are boosting gold prices. 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. 

Risk sentiment is improving, however, despite the continued crisis in Israel. The US Federal Reserve has hinted that it has reached its rate ceiling, boosting the economic world economic outlook. Market expectations that US interest rates have peaked are raising the comparative appeal of gold against the dollar as a haven asset.

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Written by:
Myrsini Giannouli

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