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Global Economy

Why the price of gold is rising

Gold prices have hit an eight-month high amid the Ukraine crisis. Investors on the commodity markets are paying up to $1,898 for a troy ounce of gold, more than they have been since mid-June 2021. The yellow metal has been in an uptrend amid high volatility since its August low of $1680.

Geopolitics fuel gold demand

Demand for gold was recently boosted by the events on the Ukrainian border and the resulting fear of war among investors. In the course of the week there were supposed "signals of relaxation" from the Russian side. So far, however, neither the Western military alliance NATO nor the German government have wanted to confirm that Russia has actually withdrawn troops from the border area with Ukraine.

What's more, NATO Secretary General Jens Stoltenberg warned that the Russian military could launch a full-scale invasion of Ukraine at virtually any time without much warning. In the afternoon, Russia even demanded the withdrawal of all US soldiers from Eastern and Central Europe.

Next target $1900 mark?

It is primarily this unclear news situation about the Ukraine crisis that is leading to "apparently strong demand for gold as a safe haven," explains Commerzbank commodities expert Daniel Briesemann. This is also reflected in corresponding ETF inflows.

There still seems to be "a certain momentum" in the market, as Craig Erlam, market analyst at forex broker Oanda, points out. The $1900 mark could therefore soon be tackled. "This is the next big test for the yellow metal and a major escalation in Ukraine could be the catalyst for such a move," Erlam said.

Fed less "hawkish"

But it is not only the geopolitical uncertainty that is driving investors on the international financial markets out of risky investments such as shares and into "safe havens" such as gold and government bonds. The latest developments with regard to the US interest rate turnaround are also giving the yellow precious metal a boost.

At first glance, the minutes of the Federal Reserve (Fed) meeting of January 26, published yesterday, did not contain much that was new. But apparently the US central bankers are less "hawkish" than feared, stressed Credit Suisse. A little later, James Bullard, head of the Federal Reserve Bank of St. Louis, also supported this impression when he put his recent statements in favor of interest rate hikes into perspective on the US television channel CNBC.

But not a big rate hike?

Recently there had been increased speculation on the markets that the Fed could initiate the turnaround in interest rates in March with an interest rate step of 0.5 percentage points. After the Fed minutes, the number of market participants anticipating such a large rate hike fell noticeably. According to CME Group's Fed Watch Tool, the probability of that happening is now just 40.5 percent. 59.5 percent expect the key interest rate to rise by 25 basis points.

Falling interest rates make investing in gold more attractive. After all, the yellow precious metal itself does not yield any interest or dividends. The so-called real interest rate, i.e. the nominal interest rate minus the inflation rate, is relevant for the price of gold. Should US 10-year Treasury yields now peak and fall again while inflation remains elevated, that would be an optimal scenario for gold.

Strong dollar as a stress factor

Should the dollar also fall, this would be tantamount to a "booster option for gold", emphasizes Robert Retfheld, market expert at Wellenreiter-Invest. But it doesn't look like that at the moment. In fact, the US dollar had recently gained across the board. A strong dollar, in turn, makes commodities traded in dollars more expensive in the non-dollar area and thus also dampens demand for the yellow precious metal.

The overarching prospects for the gold price – beyond the Ukraine crisis – are therefore by no means as bright as it might seem at first glance. And the "safe haven" bonus could possibly melt away quickly. It is not for nothing that the bon mot applies on the financial markets that political stock exchanges have short legs.

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