Gold prices boosted by risk aversion sentiment

Gold prices benefitted from the dollar’s sudden dip on Monday, climbing above $1,930 per ounce. If gold prices increase, resistance may be encountered near $1,950 per ounce, while if gold prices decline, support may be found near $1,900 per ounce. Increased risk aversion sentiment ahead of Wednesday’s Fed rate decision, boosted gold prices on Monday.

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 dipped on Monday and the dollar index dived from 105.3 to 105.1. US Treasury yields remained firm, with the US 10-year bond yielding above 4.32%. High US treasury yields put a lid on gold’s ascent on Monday.   

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. The U.S. Federal Reserve raised interest rates by 25 basis points in July to a target range of 5.25% to 5.50%, the highest level in 22 years. 

Market participants will be focusing on the Fed’s interest rate announcement this week on the 20th and the Fed’s forward guidance. Most investors are anticipating a pause in rate hikes, but the US central bank has signaled that further tightening is possible if inflation does not go down consistently.

The Fed is expected to keep interest rates stable after its meeting on Wednesday, but analysts do not discount another rate hike in November. The Fed’s monetary policy outlook this week is likely to affect gold prices considerably. If the Fed maintains a hawkish stance, it could drive gold prices down further.

Inflationary pressures in the US are not easing just yet, despite the Fed’s high-interest rates. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.

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Written by:
Myrsini Giannouli

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