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(Kitco News) – The gold market continues to face an uphill battle as the Federal Reserve is expected to maintain its aggressive monetary policy stance; However, analysts are also warning potential short sellers that safe-haven demand will continue to provide key support for the precious metal.
Gold’s safe-haven appeal was boosted overnight when Russian President Vladimir Putin escalated his war with Ukraine, mobilizing reservists to fight in the ongoing invasion.
Putin also threatened to use nuclear weapons and said in his speech that Russia is defending its territory against Western nations.
“Russia will use all the tools at its disposal to counter a threat to its territorial integrity – this is not a bluff,” he said in his address.
Russia’s latest move in its war with Ukraine has pushed the US dollar to a fresh 20-year high above 110 points. However, gold has managed to hold its ground in the face of new US dollar momentum.
December gold futures were last traded at $1,683.40 an ounce, up 0.63% on the day. Some analysts have said gold could have room to rally to $1,700 an ounce depending on how aggressive the Federal Reserve will be when it releases monetary policy decisions later in the day.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said recent price action shows how safe-haven demand has been a key driver for gold, even as prices have fallen to a two-year low and tested support at a critical juncture to have. term support level.
“Safe-haven demand has helped gold outperform other assets and avoid a full collapse as we see a 10 percent rally in the US dollar and the largest bond sell-off in recent history,” he said.
The start of the Russian invasion in late February helped push gold prices briefly to $2,000 an ounce; However, this geopolitical threat has slowly slipped off the radar for most investors, with the main focus being on rising inflation and central bank rate hikes.
Jim Wyckoff, senior technical analyst at Kitco.com, said safe-haven demand is back at the forefront.
“The longer the war drags on and Russia makes little progress, the more threatened Putin becomes, which could prompt the dictator to take more drastic measures to ensure his own survival,” he said. “Precious metal dealers seem to think that Putin’s threats are a big deal.”
At the same time, Wyckoff said gold’s rally will depend heavily on the Federal Reserve’s monetary policy decision.
“More Russian threats to Ukraine and West could push gold prices back above $1,700. If the Fed surprises the market by being even more hawkish than expected this afternoon, it would likely overshadow the optimistic news on Russia, at least for a short while. He said. “No big surprises from the Fed this afternoon probably wouldn’t move markets much and then Russia news for gold and silver would stay on top.”
However, there are some analysts who see gold’s robust strength as just a short-term correction in a broader downtrend.
“It seems unlikely that gold ETF inflows will sustain a sustained recovery until traders see a turn in the Fed’s tightening cycle and/or there is a consensus of a US/global recession,” said commodities analysts at Citi in a research note.
Analysts at TD Securities believe gold’s renewed bullish momentum will be short-lived given the Fed’s more hawkish stance.
“We expect the FOMC to deliver its third straight rate hike of 75 basis points, putting monetary policy stance well above its estimate of the longer-term neutral level Chair Powell to build on his message from Jackson Hole. With that in mind, we see the potential for continued outflows from money managers and ETF holdings to weigh on prices going forward,” the analysts said in a statement.
Hansen said that while gold faces continued headwinds from rising interest rates, he added that in addition to providing safe-haven demand, he also sees gold as an important hedge against policy failure as the central bank will be unable to contain inflationary pressures to get under control.
“The market is seriously misreading the Fed’s ability to bring inflation under control. Markets are very optimistic that the Fed will be able to bring inflation back down to 2%, but the question is: will the Fed be able to curb growth enough to make it happen? “Inflation back to 2%,” he said. “However, gold will remain under pressure until the market starts smelling a spike in interest rates.”
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