Gold breaks below $1,700 on prospects of higher rates and a stronger dollar

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Vrasidas Neofytou
Head of Investment Research

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Gold breaks below $1,700 on prospects of higher rates and a stronger dollar

The price of Gold fell to as low as $1,685/oz on Thursday morning, its lowest level since early August 2021, as investors turned bearish on the yellow metal following the hawkish monetary policy stance by major central banks, the soaring dollar and bond yields at a time safety and inflation-hedged flows are directing to haven currencies instead to gold.

Gold, Daily chart

The prospects of more interest rate hikes by the Federal Reserve and European Central Bank to tackle the 40-year record-high inflation have added pressure to the rate-sensitive and non-yielding yellow metal, which retreated off yearly highs of $2,070/oz in early March (after the Russian invasion of Ukraine) to below $1,700/oz support level, down nearly 18% in just 4 months.

The European Central Bank is expected to raise rates by 25bp or 50bp for the first time in 11 years later today on Thursday to fight inflation that climbed by more than 8% in Eurozone, while the Federal Reserve is widely expected to raise rates by 75 bp at its July 26-27 policy meeting.

On top of that, the soaring U.S bond yields driven by Fed’s aggressive tightening stance have also lifted the U.S. dollar to 20-year highs against major currencies, making the dollar-denominated gold more expensive for buyers holding other currencies.

Gold is also losing safety and inflation-hedge bets as the surging interest rates are making more attractive the safe and yield-bearing greenback vs bullion such as gold and silver which pay no yield.

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