While volatile commodity investors continue to look to precious metals, especially gold, in recent days precious metals have returned to the top of the leaderboard and boosted their gains.
“Inflationary factors put pressure on central banks”
The commodity space rose on Friday as oil prices rose on fears of possible supply shortages due to the Russia-Ukraine conflict. DailyFX senior strategist Chris Vecchio comments:
Volatility, catalyzed by the Russian invasion of Ukraine, has been the defining feature of all asset classes in recent weeks. The global supply chain is in turmoil. Commodity prices rose, threatening both companies’ margins and consumers’ spending power. Developments put pressure on central banks to reduce incentives and tighten monetary policy.
TDS: We can still see a coordinated reversal flow
The big news that continues to be digested by the markets is cryptocoin.com 25 basis point increases, with the Federal Reserve predicting six more increases for this year, as we reported. On top of this hawkish stance, Fed Chairman Jerome Powell told reporters that the US economy could “handle” tighter monetary policy and that the risk of recession was not high. TD Securities strategists interpret the developments and their effects on gold prices as follows:
Gold prices are strengthening despite the undeniably hawkish FOMC. It lends a lifeline to trend followers if prices rise above $1,920. Price action also shows that a union is seeing the Fed’s walking profile too slow given the inflation pressures the economy is facing.
According to TD Securities strategists, although a coordinated buying impulse from a broad group of gold traders has helped gold prices rise dramatically over the past weeks, we can still see a coordinated flow of reversals.
The Fed’s hawkish view, however, contradicts warnings from institutions such as the International Monetary Fund (IMF) that Russia’s invasion of Ukraine will hurt the global economy by slowing growth and putting upward pressure on already high inflation. “The conflict is a major blow to the global economy that will hurt growth and drive prices up,” the IMF said in a statement on Tuesday.
The IMF also noted that Russia’s invasion of Ukraine could fundamentally change the global economic and geopolitical order if energy trade changes, supply chains are restructured, payment networks are fragmented, and countries rethink their reserve currency holdings.
According to analysts, the price of gold is currently dependent on the performance of oil.
Oil prices are rising once again, Brent and WTI are now above $100. It rallied throughout the day after the Kremlin turned down reports of significant progress in ceasefire talks. Craig Erlam, senior market analyst at OANDA, said:
Allowing oil prices to drop significantly from highs, it feels like a real setback as things are heading in the right direction. Also contributing to the rise is the IEA’s oil market assessment that Russian exports have fallen by around three million barrels per day.
Analysts see the rise of gold depending on the performance of the oil price for now. Chris Vecchio comments:
If gold prices are to make another attempt to climb to all-time highs, we will need to see another rise in oil prices and wheat prices to help revive inflation expectations. Otherwise, what’s shaped as an ugly monthly candle for gold prices warns of higher highs and more downside ahead.
“It wouldn’t be surprising if gold staged another rally”
In addition, Commerzbank analyst Carsten Fritsch states that it is not surprising that gold could stage another rally after the Fed’s tightening cycle. The analyst underlines the following points in his assessment:
Looking at previous rate hike cycles, it seems that gold tends to gain when the cycle starts. While it’s hard to compare with past rate hike cycles given the war in Ukraine, it’s the same thing happening this time around.
Craig Erlam: So gold will be relatively well supported for a while
Gold ETFs tracked by Bloomberg posted 11 tons of entries yesterday. Since the start of the war in Ukraine three weeks ago, entries have totaled 117 tons. On top of that, gold’s downside is limited for now, amid fears around high inflation and geopolitical uncertainty. “Economic concerns, high inflation, and the drop in risk appetite in Kremlin comments contributed to the rise in yellow metal,” said analyst Craig Erlam, finally making the following prediction:
At least two of them will not disappear anytime soon, and there is nothing predictable about the actions of Vladimir Putin. Therefore, gold will be relatively well supported for a while.
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