Gold volatile on increased economic uncertainty

Gold prices were volatile on Tuesday, weakening in early trading and dipping to $1,954 per ounce, but paring losses later in the day, climbing to $1,976 per ounce. If gold prices increase, resistance may be encountered near $2,022 per ounce, while if gold prices decline, support may be found near $1,951 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 gained strength on Tuesday, with the dollar index rising above 103.5. US Treasury yields weakened, however, on reduced rate hike expectations, with the US 10-year bond yield rising to 3.7%.   

The ongoing debate around the US debt ceiling is causing economic uncertainty, affecting gold prices. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. Fears of a US debt default promoted a risk-aversion sentiment in the past couple of weeks, boosting the safe-haven gold. Last week, however, House Speaker McCarthy and President Biden started talks on the debt ceiling. The two leaders have yet to reach an agreement on the US debt ceiling, but negotiations continue as the clock runs down. If the debt issue is resolved satisfactorily, gold prices may retreat.

The recent crisis in the banking sector also reduced risk sentiment, raising the appeal of safe-haven assets. Fears of a banking sector meltdown enhance gold’s haven status.

The Federal Reserve signaled a pause in rate hikes last week, causing the dollar to plummet and boosting gold prices. US Federal Reserve Chair Jerome Powell indicated that the US Central Bank may pivot towards a more dovish direction. 

The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting last week, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. Many analysts predict that there is a high probability of rate cuts starting in November. Expectations of a shift to a more dovish policy provide support for gold prices.

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Written by:
Myrsini Giannouli

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