Gold prices have surged to $1,941 per ounce despite the US Federal Reserve (the Fed) abandoning its zero-rate policy yesterday, and increasing interest rates by 25 basis points yesterday.
This follows a heavy slump over the past week, with prices dwindling to $1,912 per ounce after spiking earlier this month to $2,057.
The precious metal rode the commodities boom after Russia’s invasion of Ukraine and the ramping up of Western sanctions – placing restrictions on Kremlin-backed energy sources – while investors fled to safe haven assets.
It then dropped back as Europe failed to join the US and UK in bringing in sanctions targeting Russian energy supplies, alongside the prospect of talks between Russia and Ukraine.
Commerzbank analyst Carsten Fritsch suggested that gold typically enjoys gains at the initial stage of rate hike cycles – even if higher interest rates would have a long-term weighing effect on the metal, and that would
He said: “A glance at previous rate hike cycles shows that gold tended to gain once the cycle began. The same appears to be happening this time too, though comparisons with past rate hike cycles are difficult in view of the war in Ukraine. “
Fritsch also pointed to generally increased demand for gold amid the market volatility – as demonstrated by persistently robust ETF inflows.
The analyst noted: “The gold ETFs tracked by Bloomberg registered inflows of 11 tons yesterday. Inflows since the start of the war in Ukraine three weeks ago have hit a total of 117 tons.”.
Ricardo Evangelista, senior analyst ActivTrades, argued the latest recovery reflects gold’s inverted relationship with the dollar.
He said: “The greenback lost ground to other major currencies after Wednesday’s rate hike and Fed’s hinting at several more increases until the end of the year, as the move had already been priced into the value of the currency. The weaker dollar will be welcomed by gold bulls, as elsewhere the talks between Russia and Ukraine, which are generating hopes a de-escalation in the conflict, have diminished the safe-haven appeal of the precious metal.
Forecasting future market behaviour, Craig Erlam, senior market analyst at OANDA said prices remain elevated due to economic worries, high inflation and dipping risk appetite.
He concluded: “At least two of these aren’t going away any time soon and there’s nothing predictable about the actions of Vladimir Putin so gold should remain relatively well supported for some time yet. That may not mean we’re hitting record highs but it should limit the downside to some extent.”