Gold prices extend gains on soft US dollar, yields

Gold prices extended last week’s gains on Monday, benefitting from a softer dollar and US yields. Gold prices climbed above the $1,765 per ounce resistance, touching $1,775 per ounce. If gold prices decline, support may be found near $1,666 per ounce and further down at $1,616 per ounce. Resistance may be found at around $1,802 per ounce.

The collapse of the US dollar and yields has caused gold prices to skyrocket. The USD continued to decline on Monday, with the dollar index dropping as low as 106.5 for the first time since August. 

US Treasury yields also remained subdued on Monday, with the US 10-year bond yielding between 3.8% and 3.9%. Diminishing Fed rate hike expectations are putting pressure on US bond yields and dollar price, which had been trading in the overbought territory over the past few months.

US Monthly CPI in October rose by only 0.4% against predictions of 0.6%. Annual CPI printed at 7.7%, compared to 8.2% the previous month and the 7.9% expected. Slowing price pressures may induce the Fed to pivot towards a more dovish policy reducing the aggressiveness of future rate hikes.

Gold prices are under pressure by the shift of most major Central Banks towards a tighter monetary policy to combat rising inflation rates. Assets yielding interest become a more appealing investment compared to gold as interest rates rise. The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting. 

Fed rhetoric is especially important this week as it may provide hints on the US central bank’s direction after last week’s soft inflation data. FOMC member Chris Waller stressed on Sunday that the US central bank still has a long way to go to bring inflation down to its 2% target. He added that interest rates will continue to increase and remain high until US inflation has been brought under control. Fed’s Brainard also emphasized the need to tackle inflation but pointed to a slower pace of rate hikes down the road.

Market expectations of future rate hikes were considerably trimmed after last week’s inflation report though. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate. 

The US mid-term Congressional elections last week have also put pressure on the dollar, providing support for gold prices. Concerns that the Democratic party might lose control of Congress in the mid-term elections, leading to political instability in the US, pushed the dollar down, boosting gold prices. 

This week, high volatility is expected for gold and dollar prices, as markets will await the US mid-term elections outcome. Concerns that the Democratic party might lose control of Congress in the elections, leading to political upheaval in the US, have pushed the dollar down. Over the weekend, the Democratic party announced their victory in the key State of Nevada, which would have secured control of the House for the ruling party.  It seems, however, that the Democrats were too quick to rejoice, as votes are still being tallied and the battle for securing the Senate seems to be close.

Several indicators of economic activity are scheduled to be released on Tuesday for the US and may cause high volatility in dollar prices, which is likely to be mirrored by gold prices. Most notably, US PPI data on Tuesday may provide an additional measure of US inflation and may affect the dollar considerably in the aftermath of last week’s CPI inflation report.

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Written by:
Myrsini Giannouli

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