It seems that gold has begun to regain its luster and return to the favor of investors. In 2021, investors were wondering if gold would be a good inflation hedge. Now, in addition to inflation, there is a rise in geopolitical tensions in Europe, allowing gold to do better.
Gold prices rose to 8-month highs on Tuesday, above $1,870 per ounce. The reason for this could be the rising tension between Russia and the West over Ukraine. This, in turn, may have prompted investors to enter assets considered safe, such as gold.
Arguments of the threat of war and rising inflation
Yesterday, US Secretary of State Antony Blinken ordered the closure of the US embassy in Kiev and urged Americans to leave Ukraine, citing the rapid buildup of Russian troops near the border. Precious metals are typically seen as a hedge of capital against the impact of geopolitical conflicts.
The threat of a Russian invasion and the resulting potential supply disruptions have also pushed up oil prices, which has fueled inflation fears and could further push gold prices higher. Last week, data showed U.S. inflation hit 7.5 percent in January, the highest in 40 years.
Bullion instead of the cash phase of the cycle
Since the beginning of the year, gold has risen by 2.3 percent, despite the fact that during that time US 10-year bond yields have broken through the 2 percent level, and the market has started to price in at least five US interest rate hikes, including the possibility of a March hike of 50 basis points. This could indicate the potential resilience of gold prices against rising US interest rates and steer investors towards bullion as a hedge against inflation and possibly a larger correction in stock indices.
The U.S. economy may also have reached its business cycle peak, which is the maximum rate of GDP growth, and the maximum rate of inflation growth may be imminent. In theory, this could signify the cash phase of the cycle. As inflation has been breaking records recently, it is not worth keeping cash in the form of paper currencies, so investors may also choose gold.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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