Gold rally halted as dollar recovers

Gold prices gained strength in early trading on Thursday, testing the $1,880 per ounce level resistance. Gold’s rally was halted later in the day, however, after hot US inflation data boosted the dollar, and gold prices dropped back to $1,870 per ounce. If gold prices increase, resistance may be encountered near $1,880 per ounce, while if gold prices decline, support may be found near $1,844 per ounce. 

The crisis in Israel has intensified, giving rise to a risk aversion sentiment, and boosting demand for gold. Fears of the Israeli war spreading to the Middle East are increasing the appeal of haven assets such as gold. Gold prices increase in times of war as more traders shy away from riskier assets and invest in assets that are more likely to preserve their value. 

Risk sentiment improved this week, however, despite the continued crisis in Israel. The US Federal Reserve hinted that it has reached its rate ceiling, boosting the economic world economic outlook. Improved risk sentiment halted gold’s rally on Tuesday, but gold prices continued to rise on Wednesday. Market expectations that US interest rates have peaked are raising the comparative appeal of gold as a haven asset, while the dollar sinks.

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 hot US inflation data on Thursday, with the dollar index rising to 106.6. US bond yields also gained strength, with the US 10-year bond yielding approximately 4.7%.            

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. FOMC members kept interest rates unchanged at a target range of 5.25% to 5.50% at the Fed’s September meeting. 

The Federal Reserve paused rate hikes at its latest meeting but is likely to keep interest rates at high levels for longer to bring inflation down. At the same time, other major central banks are maintaining high-interest rates. Gold prices are under pressure since gold presents a less attractive option as an investment than interest-yielding treasury bonds.

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Written by:
Myrsini Giannouli

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