Gold has been extremely robust this year, gaining over 7% as investors ignore rising real rates and a strengthening dollar in favour of political and economic dangers.
Despite the fact that traditional yield and currency indicators show that gold is overpriced, demand for the safe-haven asset remains high. This is because gold investors who are flocking to exchange-traded funds are gloomy about the US Federal Reserve’s capacity to bring down decades-high inflation without harming the economy. Gold is a safe haven for them in the face of rising prices and stagnant growth.
“Gold has successfully questioned the Fed’s capacity to raise actual real rates while ensuring a gentle landing for the economy,” said Marcus Garvey, Macquarie Group Ltd’s director of metals strategy. “You might say that gold has severely priced the Fed’s failure.”
According to Joni Teves, an analyst at UBS Group AG, increased geopolitical instability following Russia’s invasion of Ukraine is encouraging strategic portfolio diversification among investors who are less concerned about rising real rates.
The global economic picture remains bleak, as the crisis in Ukraine and China’s ongoing fight against Covid-19 temper a strong rebound from the epidemic. Any additional escalation in the dispute, which is already dragging on economic projections, might bolster gold’s attractiveness.
Sanctions against Russia might signal a more far-reaching upheaval in the bullion market. Influential experts such as Zoltan Pozsar of Credit Suisse Group AG believe that the seizure of almost half of the Russian central bank’s foreign exchange reserves would lead to a new monetary paradigm in which gold will play a larger role.
“The present price has less to do with inflation and rising rates and more to do with geopolitical threats and the Russian central bank’s turn toward acquiring other sources of wealth,” said David Chao, Invesco Ltd’s global market strategist for Asia Pacific ex-Japan. “I’m amazed gold isn’t trading at a greater price.”
At the margin, the blacklisting of gold from Russia, the world’s second-largest producer, by western markets may be having an effect.
Nonetheless, there are hints that gold’s bull run may be coming to an end, according to several commentators. The dollar is near its highest level since July 2020, making bullion — which is priced in the US currency — more expensive for foreign investors. Inflation-adjusted Treasury yields turned positive for the first time in two years on Wednesday, while the dollar is trading near its highest level since July 2020.
As policymakers aim to reduce inflation, the outcome of the Fed meeting in roughly two weeks will be gold’s next significant test. Money market traders are betting that the US Federal Reserve will raise interest rates dramatically at the meeting to help down the country’s fastest-growing inflation rate in four decades.
In a note, Carsten Menke, an analyst at Julius Baer Group Ltd, said, “We anticipate the economy will stay resilient although pricing pressures are showing some early symptoms of peaking.” “Assuming the situation in Ukraine does not deepen, the demand for gold from safe-haven seekers should decline.”
As of 9:02 a.m. in Singapore on Thursday, spot gold was down 0.1 percent at $1 955.99 an ounce. Silver prices fell, but platinum and palladium prices rose.
According to Luc Luyet, FX strategist at Pictet Wealth Management, gold is now pricey in relation to real rates, but that difference is likely to reduce over time. “In the long run, the US’s declining economic momentum and high inflation will make monetary policy normalisation extremely difficult, favouring gold,” he added.