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Gold rallies to 6-month high in buoyant start to 2023

Gold bars arranged at the Korea Gold Exchange store in Seoul, South Korea. Gold prices on Wednesday lingered near their lowest level since April 2020, as investors prepared for the likelihood of another super-sized interest rate hike from the Federal Reserve in its effort to tackle inflation.

Gold started the new year on a solid note after ending a volatile 2022 largely unchanged, with prices rallying to a more than six-month peak on Tuesday as investors positioned for the Federal Reserve’s latest policy minutes.

Spot gold rose 0.7% to $1,836.12 per ounce, having hit a high since June 17 last year. U.S. gold futures gained 0.9% to $1,841.60.

Benchmark U.S. 10-year Treasury yields fell to their session lows, reducing the opportunity cost of holding gold, which does not pay any interest.

“Alternatively, the new year is supporting new inflows into all asset classes,” said UBS analyst Giovanni Staunovo.

However, “we continue to see rising U.S. interest rates and lower U.S. inflation as a headwind for gold, but look for higher prices later in the year, when the Fed rate hikes are expected to end,” Staunovo said.

The market focus now turns to the minutes from the Fed’s December policy meeting due on Wednesday and other economic data expected this week.

While gold is seen as a hedge against economic uncertainty, it tends to loose its appeal in a higher interest rate environment.

Bullion posted a yearly loss in 2022, albeit a small one, as hawkish Fed policies fuelled a dollar rally that challenged the precious metal’s role as a safe haven.

“The de-dollarization seen by several central banks last year, when a record amount of gold was bought look set to continue, thereby providing a soft floor under the market,” according to a Saxo Bank note.

On a technical front, above $1,842, the 50% of the 2022 correction, gold will be looking for resistance at $1,850 and $1,878 next, the note said.

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