Gold prices mirror the dollar’s movement

Gold prices exhibited high volatility on Wednesday, mirroring the dollar’s volatility. Gold prices edged higher in early trading on Wednesday, touching the $2,035 per ounce level but plummeted to $2,015 per ounce later in the day. If gold prices increase, resistance may be encountered near $2,040 per ounce, while if gold prices decline, support may be encountered near $2,000 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 exhibited strong volatility on Wednesday, with the dollar index dropping to the 102.8 level in early trading and then recovering slightly later in the day. US treasury yields also dipped early on Wednesday and then rallied, with the US 10-year bond dropping to 4.09% and then rallying to 4.15%.             

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. 

Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. 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 new airstrikes against Houthi rebels in Yemen overnight on Monday.

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Written by:
Myrsini Giannouli

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