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Gold moves higher as inflation and Ukraine fears dwarf concerns over hawkish Fed

Commentaries & Views

Market participants continue to be extremely focused on the spiraling level of inflation and war in Ukraine more than their apprehensions about future actions by the Federal Reserve to aggressively raise interest rates this year. Yesterday's release of the CPI for March which came in at 8.5% underscores concerns about a ½ a percent hike in interest rates by the Federal Reserve next month.

Gold prices have been rising steadily over this last week which illustrates that investors are more alarmed by the current level of inflation and escalation of military action by Russia in Ukraine than by the future actions of the Federal Reserve.

As of 4:55 PM EDT gold futures basis, the most active June contract is fixed at $1981.70 after factoring in a gain of $5.60. Gold prices have been advancing since April 6 the last day that gold prices declined. Over the last five consecutive trading days gold prices have moved higher. Today gold futures traded to a high of $1985.80 and a low of $1966.30.

While some analysts and the Federal Reserve have been indicating that inflationary pressures should be peaking and will begin to decline other analysts, including myself see that as an incorrect assumption. A realistic look at what is driving inflation to higher levels cannot justify the belief that inflationary pressures are peaking. Inflation had been moving higher before the invasion of Ukraine; however, the war has added additional pressure that will most certainly continue to move inflation higher. Yesterday's report showed that one of the primary forces moving inflation higher last month was the cost of gasoline which increased by 18% month over month.

The spike in energy costs was largely due to the increasing price of crude oil which is back above $100 per barrel. Currently, light crude futures are trading at $104.32 up $3.71 today, and are largely attributed to the Ukrainian conflict resulting in many European countries as well as the United States boycotting imports of Russian oil. Russia is the third-largest producer of crude oil behind the production of the United States the number one producer, and Saudi Arabia the second largest producer.

Therefore, as long as Russia's military escalates its actions in Ukraine, we can expect to see tight inventories of crude oil worldwide. This is unlikely to change soon as Vladimir Putin said on Tuesday that peace talks between their two countries are at a dead-end, promising that Russia would achieve all of its "noble" aims in Ukraine.

Another force moving inflation higher was the cost of food. Russia is the third-largest producer of wheat, and Ukraine is the fifth largest producer of corn meaning that as long as the conflict in Ukraine continues collectively Russia and Ukraine's exports will cease or diminish and continue to reduce the amount exported to the European Union pressuring food prices globally to continue to rise.

Food and energy costs globally will continue to rise as long as the war in Ukraine continues. This clearly shows that inflationary pressures are a byproduct of supply chain issues that cannot be addressed or reduced by the Federal Reserve raising interest rates.

To believe that inflation has peaked is an unrealistic assumption based on the fact that the largest rise in inflation in the United States and globally are directly attributable to rising energy and food costs. While many analysts and the Federal Reserve continue to state that inflationary levels will subside, as long as the war in Ukraine continues this assumption makes no logical sense. This is why market participants are focusing on levels of inflation rather than the future actions of the Federal Reserve.

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