Gold edges lower as US debt default fears abate

Gold prices edged lower on Monday, touching a 2-month low of $1,940 per ounce. If gold prices increase, resistance may be encountered near $1,985 per ounce, while if gold prices decline, support may be found near $1,900 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 firmed on Monday, with the dollar index rising above 104.2. US Treasury yields retained Friday’s values as Monday was the Memorial Day holiday, with the US 10-year bond yield rising to 3.83%.   

The ongoing debate around the US debt ceiling is causing economic uncertainty, affecting gold prices. Fears of a US debt default promoted a risk-aversion sentiment in the past couple of weeks, boosting the safe-haven gold, although the dollar has outperformed gold as a safe-haven asset. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 5th. This would force the country to default on its debt, leading to a major recession. 

US President Joe Biden and Republican House Speaker Kevin McCarthy announced over the weekend that they have reached a tentative agreement to suspend the federal government's $31.4 trillion debt ceiling. The deal, however, will have to pass through Congress before the US runs out of resources to meet its obligations. If the deal is finally approved, the safe-haven gold may sink even lower.

The Federal Reserve has signaled a pause in rate hikes, boosting gold prices. US Federal Reserve Chair Jerome Powell has 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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