Gold remains strong as the dollar weakens

Gold prices remained strong on Monday as the dollar plummeted. Gold prices tested the $1,877 per ounce resistance before paring some gains and dropping to $1,871 per ounce. If gold prices continue to increase, resistance may be encountered near $1,877 per ounce, while if gold prices decline, support may be found near $1,825 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 tumbled on Monday, on reduced inflation expectations. The dollar index plummeted from 103.8 in early trading to 103.0 by the end of the day. 

US Treasury yields also followed a declining trajectory on Monday, with the US 10-year bond yield dropping from 3.61% to 3.52% on diminished Fed rate hike expectations. 

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, such as the Fed, the ECB, and the BOE raised interest rates considerably in the past year. A worldwide wave of fiscal tightening has been driving gold prices down.

Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have dealt a significant blow to the economy. Many countries are facing poor economic outlooks, coupled with high inflation rates, raising recession fears. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.

As the Fed and other central banks start to scale back their aggressive rate hiking, gold prices surge. Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates.

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Written by:
Myrsini Giannouli

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