The central bank of Kazakhstan has sold as much as 60.7 tonnes of gold in the first six months of 2023. Credit: Erik Stein / Pixabay.

Gold prices rallied on Monday to settle above $2000 an ounce, prompted by a weaker US dollar.

This was spurred by a decline in US Treasury yields, after the Organisation of Petroleum Exporting Countries and its allies (OPEC+) announced cuts in oil production by 1.16 million barrels a day from May. Earlier in the day, gold touched a four-day low of $1,949.55. 

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The dollar’s initial gains were driven by bets that OPEC’s sudden production cut will pump up global energy prices, forcing central banks to increase interest rates. The surprise oil cuts also impact the outlook for inflation, as traders await the US Federal Reserve’s next move. 

The added uncertainties of inflation could force major central banks to assert aggressive anti-inflation measures, potentially causing rate hikes. While gold is traditionally seen as an inflation-safe investment, higher interest means other investments could be more lucrative than gold. The surprise cuts drove a sharp decline in the dollar, in which the bullion is priced. 

Coupled with speculation over possible changes to interest rates, the dollar grappled with the release of weak US economic data. The US non-farm payroll report released on Friday showed that the economy added just 266,000 jobs in April, well below the expected figure of 1 million jobs. The data suggests that the economic recovery in the US may not be as robust as previously anticipated, which has led investors to seek safe havens such as gold.

Manufacturing activity slumped in the US in March, marking its lowest level in three years because of tighter credit conditions. Gold prices edged lower on Tuesday owing to the assessment of data on US manufacturing activity. 

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Spot gold was down 0.2% at $1,980.39 per ounce on Tuesday, and US gold futures dipped 0.1% to $1,997.70.

The CME Fedwatch suggests a 62% chance of rate hikes from the Fed in May, while investors foresee another 60-basis point of rate hike from the European Central Bank.