Gold price supported by rising inflation, geopolitical tensions

The price of gold has been exhibiting high volatility the past few days, spurred by the Ukrainian crisis rollercoaster. Mounting geopolitical tensions also send inflation rates up, as the value of certain commodities, and especially of energy-related assets, increases. The price of gold benefits from rising inflation, since the metal is often used as an inflation hedge.

On Monday morning, hopes of a peaceful resolution to the crisis in Ukraine were revived, amidst reports of a possible peace summit between Russia and the US, brokered by French President Emmanuel Macron. Risk appetite grew following the announcement of a possible meeting between the Russian and US presidents, dampening the appeal of gold and pushing the price of gold down. 

Hopes for a diplomatic resolution to the issue were diminished later on Monday though, as Vladimir Putin signed a decree recognizing the independence of the two separatist regions Donetsk and Luhansk in eastern Ukraine. Immediately afterward, he ordered Russian troops in these regions, in a ‘peacekeeping’ mission as he declared, effectively invading Ukraine. The EU, the UK, and the US have condemned the Russian President’s actions and are prepared to enforce economic sanctions on Russia. Mounting geopolitical tensions support the price of gold, as risk appetite diminishes and demand for safer assets grows.

The gold price was catapulted to $1,914 per ounce on Monday, following Putin’s announcement and on Tuesday gold traded sideways, around the $1,901 per ounce level. If the price of gold continues to rise, it may find resistance near its June 2021 high at $1,917 per ounce, while if it decreases, support may be found at 1,782 per ounce.  

US treasury yields fell during the past couple of days, as demand for safe assets increased. Treasury yields compete directly with gold as an investment, as gold does not pay dividends or interest. 

This week, the Russia - Ukraine crisis is expected to strongly influence the gold price. Economic and inflation indicators scheduled to be released in the US, and especially the US PCE inflation indicators, may also affect the price of gold, as the Fed’s much-anticipated meeting in March is drawing near.

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Written by:
Myrsini Giannouli

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