Gold prices hit by resurgent dollar and upcoming interest rate hike
Gold prices showed some signs of recovery this afternoon after tumbling to a two-and-a-half month low earlier in the day, with US Treasury yields and the US dollar paring back from this week’s surges.
Spot gold peaked at $1,877.79 per ounce in the afternoon, despite prices dipping to $1,849.90 earlier in the session, its lowest level since February 16.
This follows US benchmark 10-year Treasury yields backing off the three per cent level which had caused prices to tumble, while the dollar index was down 0.3 per cent, making bullion less expensive to other currency holders.
Nevertheless, sentiment towards the precious metal remains gloomy, with investors wary of an aggressive interest rate hike from the Federal Reserve (the Fed) when it concludes its two-day policy meeting tomorrow.
Despite gold being perceived as an inflation hedge and a flight-to-safety asset, higher US interest rates lift the opportunity cost of holding zero-yield bullion.
Market analysts expect the Fed, led by Chairman Jerome Powell, to raise rates by 50 basis points to rein in soaring inflation, with further rate hikes expected this year.
The downturn in gold’s performance follows multiple rallies for the precious metal, which peaked at $2,070 per ounce on March 8 amid a bevy of sanctions on Russia after its invasion of Ukraine.
Prices have fallen back since macroeconomic factors and hawkish Fed policy began driving investor sentiment again, with inflation climbing to 8.5 per cent amid a deepening cost of living crisis.
Daniel Briesemann, Commerzbank analyst, noted that the dollar which is trading at close to its highest level since 2002 on a trade-weighted basis, that the revival of bond yields has particularly affected gold’s performance.
He explained: “Bond yields have risen further – yields on ten-year US Treasuries briefly exceeded the three per cent mark today for the first time in 3.5 years, even though the ISM index proved disappointing. This has pushed real interest rates back into positive territory for the first time in over two years, which makes gold less attractive as a non-interest-bearing alternative investment. This may also be why ETF investors sold another four tons of gold yesterday.”