Macroeconomic outlook to dominate gold market not geopolitical uncertainty - Metals Focus
(Kitco News) - The world is seeing a rise in geopolitical uncertainty, with tensions rising between the U.S., Russia, and China and further instability in the Middle East. While this volatility could create some safe-haven demand for gold, one firm said that might not be a significant price driver.
Analysts at Metals Focus recently looked at the impact geopolitical instability has on gold. They said that foreign affairs issues could create knee-jerk reactions in gold; however, the move traditionally does not prove to be sustainable. The analysts noted that this pattern had established itself in the last 40 years of conflicts.
Due to the rising tensions at the Russia-Ukraine border, Metals Focus looked at the last time these two nations conflicted with each other.
"Having fallen to a multi-year low towards end-2013, gold had then staged a short-lived recovery, which saw it briefly exceed $1,380 in March 2014. While this crisis underpinned these gains, they proved to be short-lived, as the positive macro backdrop continued to weigh on gold," the analysts said.
However, the analysts also noted that the sanctions placed on Russia after it invaded and annexed the Crimea region prompted the country to diversify some of its foreign reserves. As a result, the Russian central bank became a major gold buyer.
The U.K. research firm noted that during the 2017 North Korea missile crisis, gold prices enjoyed short-lived gains; however, investors were ultimately more focused on the global economy's growth.
Another topic that Metals Focus is watching is the ongoing dispute between the U.S. and China. The analysts noted that the trade war during the Trump presidency helped push gold prices to $1,500 an ounce in mid-2019.
The latest example Metal Focus looked at was the Jan. 6 storming of Capitol Hill in Washington.
"The storming of the U.S. Capitol this January had a pronounced impact on gold, which revisited the $1,950 level for the first time since early November last year. The price, however, was unable to hold onto its gains, and by early March had fallen to $1,677, its lowest since early June 2020," the analysts said.
So far this year, gold prices have struggled as bond yields and the U.S. dollar have pushed higher due to growing expectations that the U.S. economy will see a vigorous economic recovery from the COVID-19 pandemic.
Metals Focus said that this will remain the dominant factor driving gold prices throughout the year. The analysts said that they remain bullish on gold as they expect interest rates to remain low even as the global economy recovers.
"While several geopolitical events have the potential to escalate, including on the Ukrainian border, more important for the gold price will be the still supportive macro backdrop," the analysts said. "Monetary and fiscal policies, including the persistence of ultra-low interest rates and negative real yields, and concerns about future inflation will continue to make the case for strong gold investment for the foreseeable future."