(Kitco News) Gold and silver see unexpected rebounds as prices hit two-month highs. Investors are flocking to safe-haven metals as inflation and geopolitical tensions trigger heightened volatility ahead of the Federal Reserve meeting next week, analysts told Kitco News.
February gold futures rose more than $30 on Wednesday, last trading at $1,842.90 an ounce. Meanwhile, March silver futures jumped more than 3%, last trading at $24.21.
As prices began to move, markets digested more signs of problematic inflation globally. In Britain, annual inflation rose more than expected, rising 5.4% in December — the highest reading since March 1992. Canada’s inflation rate also hit its highest level in 30 years , with the consumer price index rising to 4.8% on an annual basis in December. .
Higher inflation figures add to risk aversion sentiment in the market, which is already pricing in more rate hikes and a greater possibility that central banks will make a policy mistake while tightening.
“Given calls for even bigger rate hikes this year than markets expect, not to mention larger individual increases than we have seen for many years, we may be seeing a hedge against the inflation by traders who don’t think central banks are doing enough to ease price pressures,” said Craig Erlam, senior market analyst at OANDA.
Geopolitical tensions are also starting to favor precious metals as investors become more cautious. The rise in gold and silver coincided with the Biden administration’s announcement of an additional $200 million in defensive military aid to Ukraine, citing fears of a Russian invasion.
“I was looking for headlines and data releases that coincided with gold’s surge this morning. I can’t help but feel that there is growing concern about what is happening with Russia and Ukraine. This morning we learned that the United States had released $200 million in military aid to Ukraine. And this follows reports over the weekend that the United Kingdom was providing assistance military to Ukraine. It’s just like a perfect mix here for very short-term gold prices,” said DailyFX senior strategist Christopher Vecchio. Kitco news.
The expiration of volatility options on Wednesday also sent gold higher. “Traders have been forced to reinvest their exposure into higher priced volatility contracts. And as a result, we are seeing a spike in volatility in Treasuries and the VIX. Gold prices are enjoying a nice little tailwind here,” Vecchio said.
Gold tends to benefit from higher volatility because it means greater uncertainty and higher demand for safe havens. “It’s kind of like a perfect mix of things to produce a very short-term rally for gold prices. Treasury yields have pulled back, the US dollar is down slightly, but with volatility measures that explode higher, it looks like gold has a good reason here for a short-term bounce,” Vecchio added.
In addition to the uncertainty angle, January is a historically good month for gold. “When you look at seasonality metrics, January has been the best month of the year for gold in the last five to 10 years,” Vecchio said.
Improving physical demand in Asia is another positive driver for the yellow metal from a seasonality perspective.
“Chinese gold demand alone is preventing gold prices from collapsing under the weight of a hawkish Fed. As we approach the Chinese New Year, physical demand in the Middle Kingdom remains extremely strong, SGE data for December showing 193 million tonnes out of vaults,” TD Securities commodity strategists said. “Chinese traders [also] significantly added to their gold length, while simultaneously covering their notable silver short and adding a marginal long position in the white metal. It comes amid signs of policy easing in China, as domestic growth weakens and infections spread, but also ahead of Chinese New Year festivities. »
However, whether that move will sustain its gains is another question, especially in light of rising Treasury yields and a hawkish Federal Reserve, Vecchio pointed out.
“I don’t necessarily have a lot of confidence in that move higher,” he said. “We’ve seen US Treasury yields, both nominal and real, rise significantly here in early 2022. Historically speaking, when real yields rise, gold prices tend to fall. And we have an environment defined by tighter monetary policy and reduced inflation measures over the course of this year. This suggests that real yields will continue to rise. And so I don’t have much confidence in gold’s upside here today today.
There are better prospects for silver from an economic perspective as the precious metal is used in renewable energy processes. “The demand for silver has real economic utility relative to gold,” Vecchio said. But there is strong resistance at $24.90, and traders should take profits at these levels in the near term, he added.
Despite the potential for silver to catch up with gold, analysts at Commerzbank also predict that gold and silver price gains will be short-lived due to the hawkish backdrop of the Federal Reserve.
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