Gold typically has an inverse relationship with the U.S. dollar and Treasury yields, though its performance rates in the last few days have proven otherwise. Despite the U.S. dollar and yield strength, the precious metal continues pushing upward, proving its resilience as investors flock toward the safe-haven asset. With the upcoming interest rate meeting on everyone’s minds and the tensions only worsening overseas, nothing seems to break gold’s path toward success.
The U.S. dollar and Treasury yields experienced a brief dip before quickly bouncing back last week. Most would expect gold to retreat with this refound U.S. dollar strength, yet the precious metal seemed to defy gravity, holding its bullish position.
On Friday, 10-year Treasury yields closed at 4.845 while the U.S. dollar index reached 106.58 levels. At 8:40 p.m. GMT, gold futures hit a high of $2,018 per ounce, breaking key psychological $2,000-per-ounce levels. Gold futures closed Friday just barely below the line at $1,998.50 per ounce.
“Globally, gold prices are on the rise due to the uncertainty in the international market created by the Israel-Hamas conflict and its impact on global economic conditions, followed by the strengthening of the U.S. Dollar,” Colin Shah, MD at Kama Jewelry, explained.
“This price rise will further drive investors towards gold, owing to its credibility as one of the safest asset classes. With the Fed likely to maintain its stance in the upcoming meeting with the scope for one rate hike during the year, it is expected to keep the gold price within the range of $2,000 levels,” Shah continued.
At the same time, analysts expect gold retail demand to continue rising ahead of the upcoming holiday season. The wedding season in India, as well as Diwali and numerous other festivities, all spike gold purchases as consumers buy jewelry for cultural purposes. With India being the second-largest gold buyer in the world, this increase in demand could have a positive influence on international gold performance as well.
“With the festive season and wedding season, we see the price dynamics to be of little to no hindrance for the Indian gold buyers owing to the rise in per-capita income and the sentimental value attached towards buying gold during the festive season and weddings, a tradition well-kept in the Indian culture,” Shah explained.
Between the rising tensions overseas, the upcoming rate hike decision, and expectations for rising retail demand, it makes sense that gold isn’t hesitating from the rising U.S. dollar strength. Investors aren’t paying attention to the U.S. dollar’s performance rates as they expect the strength to be short-lived. Right now, traders are concerned with storing value using a secure, safe-haven asset in preparation for the worst-case scenario, given the outbreak in the Middle East.
“Market is more concerned about the rising Middle East tension, as it believes that U.S. treasury yields and U.S. dollar will cool down in near term as chances of U.S. Fed rate hike are low. So, U.S. dollar and U.S. treasury yields are no more working a taper for gold price rally,” Anuj Gupta, the Head of Commodity and Currency at HDFC Securities, explained.
In other news, AUD/USD plummeted to its lowest point since last November despite Australia’s central bank mentioning a rate increase at its next meeting. The Hang Seng Index (HSI) in Hong Kong also decreased. Equity markets have been lulling based on signals from the Federal Reserve.
Moving forward, traders can keep their eyes on the performance rates of all three assets, the outcome of the upcoming Federal Reserve meeting, and any pertinent news coming from the Israeli-Palestine war. Worsening tensions would likely increase safe-haven buying, as would dovish statements from the Federal Reserve during the upcoming meeting. Recent statements from Fed committee members regarding interest rates already gave rise to gold as many realized we may be nearing the end of the rate-hiking cycle.
Jerome Powell, Fed Chair member, agreed “in principle” that the high rates have improved the tight financial conditions of the economy and “at the margin” could reduce the need for a rate hike in the future. Dallas Fed President Lorie Logan agreed, explaining that the committee has more time to make its next decision regarding interest rates.
Given the latest data and economic readings, Logan thinks the committee shouldn’t change rates yet. “We have some time,” Logan stated when mentioning the next rate decision.
As always, investors should consult their advisors before making any portfolio moves.