Gold extends gains as yields retreat

Gold prices gained strength on Wednesday, rising to $1,970 per ounce, after dropping to a two-month low of $1,940 per ounce on Monday. 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 gained strength on Wednesday, with the dollar index climbing above 104.4. US Treasury yields retreated, with the US 10-year bond yield dropping to 3.64%.    

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. The deal to increase the debt ceiling was presented to the US Congress on Wednesday despite opposition from hard-right Republicans. US lawmakers will be called to assess the deal with little time to spare. If the deal is finally approved, the safe-haven gold may sink.

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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