Gold supported by increased geopolitical risks

Gold prices edged higher on Thursday, rising to $2,016 per ounce. If gold prices increase, resistance may be encountered near $2,060 per ounce, while if gold prices decline, support may be encountered near $2,000 per ounce. 

Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. 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, boosting 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. The US and the UK have launched a coordinated action against Houthi rebels in Yemen. The coalition delivered a series of air and sea strikes against Houthi targets in Yemen, risking retaliation from Iran. The US put Houthi rebels back on its list of terrorist groups on Wednesday, as the militants attacked their second US-operated vessel in the Red Sea region this week.

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 edged higher on Thursday, with the dollar index climbing to the 103.6 level boosted by rising treasury yields. US treasury yields continued to gain strength, with the US 10-year bond yielding approximately 4.15%. Fed rate cut expectations in March are declining, boosting the dollar and treasury yields.           

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 fluctuate strongly, affecting gold prices. Markets odds of a 25 bp rate cut in March dropped below 55% this week from 70% last week boosting the US dollar and treasury yields and pushing gold prices down.

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Written by:
Myrsini Giannouli

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