Gold boosted by declining US treasury yields

Gold prices surged on Thursday, rising to the 2,050 per ounce level. If gold prices increase, resistance may be encountered near $2,066 per ounce, while if gold prices decline, support may be encountered near $2,013 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 rallied on Thursday after the release of the US PCE data, with the dollar index rising to 104.2. US treasury yields, on the other hand, edged lower, with the US 10-year bond yielding approximately 4.25%.           

Gold prices are likely to be influenced by US fundamentals this week, which will also determine the dollar’s movement. Core PCE Price Index data released on Thursday were in line with expectations. Core PCE, which is the Fed’s preferred inflation gauge, rose by 0.4% in January compared to December’s 0.2% growth.  On an annual basis, Core PCE was at 2.8% in January, down from 2.9% in December. Core PCE Price Index data showed that US disinflation is progressing, albeit slowly. 

Preliminary US GDP data on Wednesday were underwhelming, putting pressure on the dollar. The US economy remains robust and expanded by 3.2% in the final quarter of 2023, missing, however, market forecasts of 3.3%.

The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.

Rate cut expectations have been fluctuating strongly in the past couple of weeks, affecting gold prices. Odds of a rate cut in March dropped to 7% after the release of the US inflation data, from over 50% two weeks ago. Rate cut odds in May are also down to 30% from over 80% a few weeks ago. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly. 

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.

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Written by:
Myrsini Giannouli

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