US Fed’s Powell was relatively calm and said that he is not very sure how badly this war is going to hurt the US economy, but there is a surety of one thing - rising commodity prices. Hence, he said March 0.25% hike should be appropriate. Now, the Fed’s May and June policy could also see a similar 0.25% rate hike, according to Fed-Fund-Meter.
We all know any rate hike usually weighs down on gold. But strangely, gold has been resilient in January and early February. The reason behind this robustness was the geopolitical stress of the Russia/Ukraine situation, and this may continue to underpin moves higher if the conflict worsens or sanctions don’t have the desired effect, according to the largest bullion dealers in India.
Gold price extended its range play around the $1,930 level for the third consecutive day, reversing a part of Wednesday’s sell-off. Russian bond and currency are getting into junk and become worthless very fast, yesterday late night came with some best stance from Russian Admin, and they are seemingly calm and readying even for a ceasefire. It is quite possible that sooner or later, a puppet president will be appointed in Ukraine. On the other hand, crude is playing havoc as it reached nearly $115. Other oil-importing countries like India and China will be severely affected if crude sustains these high bands, leading the gold and silver will see a good ripple.
Soaring oil prices, a fallout of the Russia-Ukraine crisis, have refuelled stagflation concerns worldwide, reviving gold’s demand as a haven. Meanwhile, the US dollar continues to hold fort amid ongoing strength in the Treasury yields due to the hawkish Fed Chair Jerome Powell’s testimony. Besides looking for a store of value in times of heightened market stress, we believe many investors see the coming rate hiking cycle as extremely risky given the abnormal macroeconomic backdrop.
The next direction in gold price hinges on the outcome of round two of the Russia-Ukraine ‘peace talks’ while the US economic data will continue to play second fiddle. Ring times of market turmoil, investors turn to gold given its perceived haven status, much to the happiness of the largest bullion dealers in India. As Russian troops invaded Ukraine on 24 February, the yellow metal reached $1,974/oz, the highest it has been since September 2020, taking the gold dealers in India by a surprise. However, even before the situation escalated, we were already seeing signs that institutional demand for gold as a portfolio hedging instrument was turning positive.
Demand for gold as a store of value is climbing, as investors confront soaring inflation and the economic uncertainties caused by Russia’s invasion of Ukraine. Gold spot prices have rallied 6.3% year to date to $1,945.30 per ounce on Wednesday. The current uncertainties suggest that institutions are likely to continue to give more consideration to portfolio diversifiers such as gold, as other choices look less appealing, bringing lots of wealth for the gold dealers in India. So, one potential scenario is a spurt towards those all-time highs over the next two weeks before the gravity effect of higher interest rates starts to pull gold prices down again. We think this will continue through 2022 regardless of how the geopolitical situation evolves.
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