Gold and silver prices appear to be heading for their highest levels in two months. That could mean investors are turning to so-called safe havens as inflation and geopolitical tensions create heightened nervousness and uncertainty ahead of next week's Federal Reserve meeting.
Gold futures rose more than 30 USD on Wednesday to settle at $1,842 an ounce. At the same time, silver futures were up more than 3 percent at $24. As precious metals prices began to rally, markets learned of further signs of problematic inflation globally.
Inflation records in the United Kingdom and Canada
In the U.K., annual inflation rose more than expected, reaching 5.4 percent in December, the highest reading since March 1992. Canada's inflation rate also rose to its highest level in 30 years, with the consumer price index there reaching an annualized 4.8 percent in December.
Higher inflation may increase risk-off sentiment in a market that is already pricing in further rate hikes and a greater likelihood that central banks will make a mistake when tightening policy. Geopolitical tensions may also favor precious metals as investors become more cautious.
Metals attract capital from stocks and bonds
The rises in gold and silver prices coincided with the announcement by President Joe Biden's administration of $200 million in additional military aid to Ukraine due to possible fears of a Russian invasion.
At the same time, Wall Street has seen a correction in stock indices, and the U.S. bond market appears to be in the midst of a sell-off ahead of the market's expected interest rate hike. This capital may have gone in part to the precious metals market, translating into possible price increases.
With the Federal Reserve's hawkish stance and a possible rise in U.S. bond yields, can gold and silver prices sustain higher levels or is this just a one-time move? We may get some answers to these questions on January 26, when the Fed will make its decisions on interest rates.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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