The asset is rising for the third consecutive session, but a new key level must be surpassed for further growth.

Yesterday, gold prices rose by $11,20 or 0.6% to $1,828 per ounce, extending its rally since last Thursday.

Back then, gold gained 1.7% and added 1.3% on Friday, rising by 1.8% over the week.

The rally was triggered by the dovish stance of the Fed, the ECB and the BoE on increasing interest rates, as well as the low labor force participation rate in the United States. As a result, gold surpassed its 2-month high on Monday.

Gold price formation is influenced by the Fed's timing of raising interest rates, analyst Marios Hadjikyriacos noted. The price goes up when the rate hike is postponed, otherwise, it slumps.

The asset found support yesterday in Federal Reserve's statements on interest rates. On Monday, the Fed's vice chairman Richard Clarida said conditions for the interest rate hike could be cleared by the end of 2022.

The treasury bond yield continued to decline on Tuesday, after showing its biggest fall last week since June 12, 2020. This drop, along with the weaker US dollar, is boosting gold.

Key test for gold

A sharper drop in bond yields and a more severe weakening of the dollar are required for a further price surge. However, none of these scenarios seem likely at the moment, CMC Markets's chief analyst Michael Hewson said.

According to Hewson, the current key target for gold is its summer high of $1,835. The price tested this level three times this summer.

Gold is likely to face stiff resistance on this level in the short term, ABC Bullion's global general manager Nicholas Frappel noted. It is the biggest resistance point in the current downward channel from the highs of August 2020.

The price needs to surpass the level of $1,835 before the market sees new capital inflows, Saxo Bank analyst Ole Hansen said. "This move deserves some respect, but let's see if it will continue this week. I still don't see the big push that is going to come from real money asset managers," he commented.

Hansen added that a sustainable bounce of gold would require more volatility in the stock markets. When indexes are pushing record highs on a daily basis, no one is interested in holding safe-haven assets.

There are reasons for optimism, because the equity rally is concentrated in only a few stocks.

"Right now, the stock market is the tail that is completely wagging the dog. The risk is, with the rally so concentrated in a few stocks; momentum could turn on a dime," Hansen said. "The way the stock market is behaving right now, I wouldn't be surprised if we saw another December like 2018. It was the worst December since 1930."

The S&P500 fell by 14% in December 2018, dropping to its 2-year low.

Inflation is in focus

Other potential headwinds include rising inflationary pressures that could eventually create a disconnect between the US dollar and gold.

The Friday report by the US Labor Department fueled inflation fears. The Labor Department stated that wages saw an annual increase of 4.9% in October. According to some economists, companies are boosting wages to attract workers that are leaving the workforce.

The Federal Reserve has reiterated its stance that higher inflation remains transitory, increasing the wage pressure.

"If inflation does start to pick up and central banks are behind the curve, then you will want to have a few gold coins in your pockets.", Ole Hansen commented.

In the short term, gold prices are likely to be influenced by the PPI and CPI data, which are set to be released today and tomorrow respectively.

These indicators will test the Fed's position on increasing the interest rate. Labor market strains and the global supply chain crisis may lead to a new inflationary spike.