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Gold price rallies $30, silver price surges more than 3% as investors flock to safe-havens

Kitco News

(Kitco News) Both gold and silver are seeing unexpected rallies, with prices hitting two-month highs. Investors are flocking to safe-haven metals as inflation and geopolitical tensions are triggering increased volatility ahead of the Federal Reserve meeting next week, analysts tell Kitco News.

February gold futures were up more than $30 on Wednesday, last trading at $1,842.90 an ounce. In the meantime, March silver futures surged more than 3%, last trading at $24.21.

As prices began to move, markets were digested more signs of problematic inflation on a global scale. In Britain, annual inflation rose more than expected, advancing 5.4% in December — the highest reading since March 1992. Canada's inflation rate also rose to the highest in 30 years, with the consumer price index climbing to 4.8% on an annual basis in December.

Live 24 hours gold chart [Kitco Inc.]

Higher inflation numbers are adding to the risk-off sentiment in the marketplace, which is already pricing is more rate hikes and a higher possibility of central banks making a policy mistake while tightening.

"Given the calls for even more rate hikes this year than markets are pricing in, not to mention larger individual increases than we've seen for many years, perhaps we are seeing some inflation hedging from traders that don't think central banks are doing enough to bring price pressures down," said OANDA senior market analyst Craig Erlam.

Geopolitical tensions are also starting to favor precious metals as investors become more cautious. The move higher in gold and silver coincided with the Biden administration announcing 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 the gold surge this morning. I can't help but think that there is increased concern around what's happening with Russia and Ukraine. This morning, we got the news that the United States released $200 million in military aid to Ukraine. And this follows on with reports over the weekend that the U.K. was providing military assistance to Ukraine. It's just like a perfect mix here for gold prices in the very short term," DailyFX senior strategist Christopher Vecchio told Kitco News.

Volatility options expiration on Wednesday was also driving gold higher. "Traders have been forced to roll their exposure into higher-priced volatility contracts. And as a result, we're seeing a spike in treasury volatility and in the VIX. Because of the spike in volatility, gold prices are getting a nice little tailwind here," Vecchio said.

Live 24 hours silver chart [ Kitco Inc. ]

Gold tends to benefit from higher volatility because it means greater uncertainty and higher demand for safe-havens. "This is kind of like a perfect mix of things to produce a very short-term rally for gold prices. Treasury yields have taken a step back, the U.S. dollar is down slightly, but with measures of volatility exploding higher, it looks like gold has a nice reason here for a short-term bounce," Vecchio added.

On top of the uncertainty angle, January is a historically good month for gold. "When you look at measures of seasonality, January has been the best month of the year for gold over the past five-to-ten year window," Vecchio stated.

Improving physical demand in Asia is another positive driver for the yellow metal from the seasonality perspective.

"Chinese demand for gold is single-handedly keeping gold prices from collapsing under the weight of a hawkish Fed. As we approach Chinese New Year, physical demand in the Middle Kingdom remains extremely strong with SGE data for December showing 193mt of outflows from vaults," said TD Securities commodities strategists. "Chinese traders [also] substantially added to their gold length, while simultaneously covering their notable silver short and adding a marginal long position in the white metal. This comes amid signs of policy loosening in China, as domestic growth weakens and as infections spread, but also ahead of Chinese New Year festivities."

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However, whether this move has the ability to 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 faith in this move higher," he said. "We've seen U.S. treasury yields, both nominally and in real terms, move significantly higher here at the start of 2022. Historically speaking, when real yields go up, gold prices tend to go down. And we have an environment defined by tightening monetary policy and a reduction in inflation measures over the course of this year. It suggests that real yields will continue to move higher. And so I don't have a lot of faith in gold's move up here today."

There is a better outlook for silver from the economic angle because the precious metal is used in renewable energy processes. "Demand for silver has a real economic use relative to gold," Vecchio said. But there is strong resistance at $24.90, and traders are likely to take profits at those levels in the short term, he added.

Despite silver's catch-up potential relative to gold, Commerzbank analysts are also projecting gold and silver price gains to be short-lived due to the hawkish Federal Reserve backdrop.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.