Market analyst Thomas Westwater states that the gold bulls took their second weekly win despite the short rise in Treasury rates, and that the Russia-Ukraine tensions gave the bullion a geopolitical tailwind. According to the analyst, the FOMC and PCE data are likely to bring volatility to the markets. The analyst is evaluating whether this will help the bottom of the situation. Thomas Westwater’s market analysis and comments in his own words cryptocoin.com We have prepared for our readers.
How will the yellow metal act in an environment of tension?
The gold bulls recorded another win last week, and the yellow metal rose almost a full percentage point, pushing the precious metal’s monthly earnings performance into positive territory. Treasury rates retreated along the curve towards the end of the week. The 10-year Treasury yield hit its highest level since January 2020 before bond buyers stepped back into the market. A deep pullback in high beta stocks occurred amid the Treasury debacle, and stock traders likely cut their growth forecasts amid a tighter outlook on Fed policy brought on by persistent inflation.
Speaking of inflation, breakeven rates (the difference between nominal and inflation-indexed rates) fell as 2-year and 5-year measures outstripped long-term measures. Given the yellow metal’s anti-inflation appeal, the drop in breakeven rates is generally a bearish trend for gold prices. The 2-year breakeven ratio, which measures how markets see inflation 2 years later, fell from 2.47% to 2.35% during the week.
This indicates that another factor is playing a role in encouraging the gold buying seen last week. The most likely factor is escalating tension on the Ukrainian border. Gold appeals to investors as a hedge against volatility. The Russian invasion of Ukraine can certainly qualify as an event worth creating a potentially enormous amount of uncertainty in the markets, and traders hate uncertainty.
The impact of the Russia-Ukraine situation on gold is simple: if tensions rise, gold will likely strengthen and vice versa.
“If rate hike outlook is restrained, it could provide a tailwind for gold”
However, some economic events this week are front and center for bullion traders as well. The Federal Reserve’s first rate decision of the year will be announced on Wednesday. Traders will heed Fed Chairman Jerome Powell’s comment as a rate hike is not expected until March. Jerome Powell’s words on the balance sheet will be scrutinized. The Fed Chairman may also reject the view that the central bank could raise interest rates four times this year. Because that’s probably too aggressive in his opinion.
A restrained rate hike outlook could provide a headwind for gold prices.
That tailwind could get a boost this week when US inflation data is updated via the personal consumption expenditures price index (PCE) adjusted for Thursday. The Fed has already capitulated that inflation is more sticky than previously thought, so even hotter-than-expected pressure could do little to solidify the hawkish stance among FOMC members.
However, higher inflation could certainly bolster gold’s hedging appeal, especially if it follows a Fed event that lowers interest rate hike expectations for this year.
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