Gold prices slashed gains as we enter the weekend despite the continued Ukrainian occupation. The FOMC will raise rates by 25 basis points, but is likely to take a “wait and see” approach otherwise. Market analyst Thomas Westwater states that in this environment, the tide of gold will remain in place for now, but the bulls may stop before the next rise. Thomas Westwater’s market comments and analysis in his own words cryptocoin.com We have prepared for our readers.
Determinants for gold: Ukraine, war, FOMC and inflation expectations
Gold prices closed the week high and cut their losses to the weekend after the bulls failed to maintain the high-profile 2,000 level. Still, bullion remained high by over 4% this month amid rising inflation expectations driven by the conflict in Ukraine and subsequent Western sanctions. The yellow metal also benefits from the high volatility in the equity markets, increasing gold’s appeal as a haven asset.
However, the massive drop in oil prices late last week softened gold-friendly inflation bets even as the US reported its highest inflation pressure in 40 years. The rise in prices has cast a new cloud of doubt on the Federal Reserve’s account ahead of Wednesday’s rate decision, when policymakers are expected to raise the US benchmark rate by 25 basis points.
Typically, gold and other assets will focus on the Fed’s rate decision, but the FOMC thing could take a back seat to the ongoing and rapidly changing situation in Ukraine. This is partly due to the economic uncertainty injected into the global economy. Beyond the 25bps increase, the Fed may prefer a “wait and see” approach rather than offering solid policy guidance. However, the war probably only increased actual inflation in the near term. Especially if the war continues into the summer, the Fed will need to respond more aggressively this year in response to this inflation, but for now it will curb the Fed’s actions. This would benefit gold, a non-interest bearing asset.
Whether it’s a major escalation or a complete resolution of the war, gold prices could fall if short-term risks are reduced. In this scenario, inflation expectations will likely return to or close to pre-invasion levels. This will likely push gold down further, but prices may remain higher than they were before Putin’s invasion, given the spillover effects that will last longer than the conflict, albeit to an unknown degree.
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