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Is gold price at risk of a bigger pullback after $100 swings?

Kitco News

(Kitco News) After the initial geopolitical shock of Russia's full-scale invasion of Ukraine, gold has retreated below the $1,900 an ounce level. But analysts are still warning of high volatility ahead for the precious metal.

The gold market saw price swings of around $100 during the last couple of trading sessions as markets reacted to the crisis in Ukraine. April Comex gold futures were last at $1,885.40, down 2.12% on the day after hitting a 1.5-year high of $1,976.50 on Thursday.

Analysts point to clarity around sanctions as one of the reasons behind gold's pullback, adding that many were pricing in a much harsher response from the West.

"Some of the extreme political tension is off. We know Putin has invaded Ukraine in a much broader sense than we thought. And prior to that, the belief was that the response would be robust, which could very well include removing Russia from the SWIFT payment system. That didn't happen," TD Securities head of global strategy Bart Melek told Kitco News. "The sanctions, certainly judging by the markets' response, were not as strong and restrictive as they could have been."

One of the more significant outcomes was the energy market not getting hurt by sanctions, which means less oil supply stress.

"Oil prices have come off. Less inflationary expectations and higher real rates are not great for gold," Melek said. "The West is not sanctioning Russian oil or gas exports. And at the same time, we might get more support from OPEC."

On top of that, the West's disagreement over removing Russia from the SWIFT system shows that the severity of response will vary, Gainesville Coins precious metals expert Everett Millman told Kitco News.

"The resistance of many EU members to impose harsher sanctions from Russia, such as banning them from the SWIFT system, is part of the reason behind gold's reversal. Now it does seem like Europe is not aligned with the U.S. and Britain to impose the harshest possible sanctions. And that does de-escalate the crisis a bit," Millman said.

Plus, gold's geopolitically-triggered rallies usually run out of steam very quickly, he added. "That's what we saw in 2014 during the annexation of Crimea. I'm not surprised we gave back all the gains so quickly."

However, Melek warned that Russia-Ukraine tensions could reignite at any time. "During war the only thing we can be sure of is not knowing."

And Millman noted that investors should be ready for high levels of volatility going forward. "The focus of the gold market has shifted away from inflation and Fed policy to geopolitics and crisis in Ukraine. I'm expecting a lot more volatility until there is some resolution or diplomatic solution," he said.

Gold price could hit $2,000 'in only a matter of days' - analysts

Can't forget about the Fed

Aside from geopolitical tensions, good news for gold is the repricing of how many rate hikes the U.S. economy will see this year in light of the war in Ukraine.

For example, the Fed's 50-basis-point rate hike in March, which was at an 80% probability before, now is at just 24.8%, said Melek.

"The view here is that central banks may stay accommodative for longer than previously thought," he said. "This idea will support gold. Central banks don't want to remove liquidity when volatility is already elevated. They want to hit inflation hard, but they don't want to collapse the economy either."

Ukraine will be on the Fed's radar during the March decision, added Millman. "The geopolitical situation will likely prevent the Fed from hiking as many times as the markets expect. We'll get at least one rate hike in March. But it could be one and done, or we could see fewer rate hikes this year. I keep hearing 7-9 rate hikes in 2022. That's way too many," he said.

Gold's price levels to watch

Analysts are not ruling out a retest of the $1,850 an ounce level just because of how quickly the precious metal went from $1,800 to $1,900 an ounce.

"It is hard to be bullish when there is this much volatility. Even before gold's big move on Thursday, prices had blown past the $1,800 to $1,900 in just one week. I do think that we are due for a retest of some of those lower levels just because the price has moved so much so quickly," said Millman.

Melek is watching $1,860 an ounce on the lower end and $1,916 an ounce on the upper end, as he expects some range-bound trading next week.

Data next week

Aside from the focus on Russia's military action in Ukraine, markets will be paying close attention to Fed Chair Jerome Powell's testimony before both the House and Senate banking committees next week.

"[Powell's] hawkish commentary following the January Federal Open Market Committee meeting resulted in market interest rate hike expectations jumping higher with a strong chance of a 50bp interest rate increase priced in by financial markets. We suspect he will be more cautious next week given the financial market nervousness, and this will likely cement expectations for a 25bp rate increase on March 16," said ING chief international economist James Knightley.

On the data front, the U.S. employment report will be critical to watch, with market consensus calls expecting 438,000 jobs added in February.

Tuesday: U.S. ISM manufacturing PMI

Wednesday: U.S. ADP nonfarm employment, BoC rate decision, Beige Book, Powell testifies before U.S. House

Thursday: U.S. jobless claims, ISM non-manufacturing PMI, Powell testifies before U.S. Senate

Friday: U.S. nonfarm payrolls

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