Gold sees unexpected gains as prices hit two-month highs. Investors are flocking to the safe-haven metal as inflation and geopolitical tensions trigger increased volatility ahead of the Fed’s meeting next week, according to analysts.
Craig Erlam: Maybe we’re seeing traders’ hedging response
As prices began to move, markets further digested the signs of troubled inflation on a global scale. cryptocoin.com As we reported, the UK’s annual inflation increased more than expected to 5.4% in December, the highest since March 1992. Canada’s inflation rate also hit a 30-year high, and the consumer price index rose to 4.8% year-on-year in December.
Higher inflation figures add to the risk-averse sentiment in the market, which is already pricing in more rate hikes and increasing the likelihood of central banks making a ‘policy error’ when tightening. Craig Erlam, senior market analyst at OANDA, comments:
Given the projections of more rate hikes this year than markets are pricing in, not to mention larger individual increases than we’ve seen in many years, we’re seeing the hedging response from traders who perhaps think central banks aren’t doing enough to bring down price pressures.
“There is a perfect mix here for gold prices in the very short term”
Geopolitical tensions are starting to favor precious metals as investors become more cautious. The rise in gold and silver coincided with the Joe Biden administration’s announcement of an additional $200 million in military aid to Ukraine, citing fears of a Russian invasion. DailyFX senior strategist Christopher Vecchio said in a statement:
I was looking for headlines and data releases that coincided with the gold surge this morning. I can’t help but think that there is a growing concern about what is going on in Russia and Ukraine. This morning we received the news that the United States has provided $200 million in military aid to Ukraine. And that continues with news over the weekend that Britain is providing military aid to Ukraine. There seems to be a perfect mix here for gold prices in the very short term.
“The expiration of volatility options on Wednesday also pushed gold up,” said Christopher Vecchio, noting that traders had to convert their purchases into higher-priced volatility contracts, and as a result, there was an increase in treasury volatility and the VIX. The analyst explains the impact of this situation on gold as follows:
Due to the spike in volatility, gold prices are getting a little tailwind here.
January is a historically good month for gold, according to strategist
Christopher Vecchio states that gold tends to benefit from higher volatility as it means more uncertainty and higher demand for safe-havens.
This seems like the perfect mix to create a very short-term rally for gold prices. Treasury yields have pulled back a step, the US dollar slumped slightly, but with volatility measures exploding higher, gold looks like there’s good reason for a short-term bounce here.
Adding to the uncertainty angle, January has been the best month of the year for gold over the last five to ten years, when you look at seasonality measurements, says Christopher Vecchio, who says January has been a historically good month for gold.
TD Securities: China’s gold pulls up demand
China’s gold demand alone is preventing gold prices from falling under the weight of a hawkish Fed, according to commodity strategists at TD Securities, who noted that rising physical demand in Asia is another positive driver for the yellow metal in terms of seasonality. Strategists remind that as the Chinese New Year approaches, physical demand remains extremely strong with December’s SGE data showing 193 million tons out of the crates.
Chinese traders are increasing their gold positions significantly. This is amid signs of policy easing in China as local growth weakens and infections spread, as well as ahead of Chinese New Year festivities.
Commerzbank analysts see gold price increases short-lived
But whether this move is capable of sustaining its gains, especially in light of rising Treasury rates and a hawkish Federal Reserve, is another question, says Christopher Vecchio:
I don’t have much faith in this move. We’ve seen US treasury rates rise significantly here at the beginning of 2022, both in nominal and real terms. Historically speaking, when real interest rates rise, gold prices tend to fall. And we have an environment characterized by tightening monetary policy and lowering inflation measures throughout this year. This indicates that real interest rates will continue to rise. That’s why I don’t have much faith that the gold will move here today.
Commerzbank analysts, on the other hand, predict gold price increases will be short-lived due to the hawkish Federal Reserve environment.
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