Gold sees new safe haven allure as Putin threatens to use all instruments to defend its territory
(Kitco News) - The gold market continues to face an uphill battle as the Federal Reserve is expected to maintain its aggressive monetary policy stance; however, analysts also warn potential short sellers that safe-haven demand will continue to provide important support for the precious metal.
Gold's safe-haven allure was boosted overnight as Russian President Vladimir Putin escalated its war with Ukraine by mobilizing reservists to fight in the ongoing invasion.
Putin also raised the threat of using nuclear weapons, saying in his speech that Russia is defending its territory against western nations.
"Russia will use all the instruments at its disposal to counter a threat against its territorial integrity—this is not a bluff," he said in his address.
Russia's latest move in its war with Ukraine has pushed the U.S. dollar to a new 20-year high above 110 points. However, gold has managed to hold its ground in the face of new U.S. dollar momentum.
December gold futures last traded at $1,683.40 an ounce, up 0.63% on the day. Some analysts have said that gold could have room to push to $1,700 an ounce, depending on how aggressive the Federal Reserve will be when it releases its monetary policy decision later in the day.
Ole Hansen, head of commodity strategy at Saxo Bank, said that the latest price action shows how safe-haven demand has been an essential factor for gold, even as prices have dropped to a two-year low, testing support at a critical long-term support level.
"Safe-haven demand has helped gold outperform other assets and not completely collapse as we see a 10% rally in the U.S. dollar and the biggest bond selloff in recent history," he said.
The start of Russia's invasion in late February helped to drive gold prices briefly to $2,000 an ounce; however, that geopolitical threat has slowly moved off the radar for most investors, with most of the focus placed in rising inflation and central bank interest rate hikes.
Jim Wyckoff, senior technical analyst at Kitco.com, said safe-haven demand is back at the forefront.
"The longer the war drags on and with Russia making little if any further progress, the more threatened Putin will become, which could prompt the dictator to take more drastic measures to ensure his own survival," he said. "The precious metals traders apparently reckon Putin's threats are a big deal."
At the same time, Wyckoff said that gold's rally will depend greatly on the Federal Reserve's monetary policy decision.
"More Russia threats to Ukraine and the West may well push gold back above $1,700. If the Fed surprises the marketplace by being even more hawkish than expected this afternoon, that would likely to overshadow the bullish Russia news, at least for a short while," he said. "No big surprises from the Fed this afternoon would likely not move the markets much, and then the Russia news would remain on the front burner for gold and silver."
However, there are some analysts who see gold's resilient strength as just a short-term correction in a broader downtrend.
"It seems unlikely that gold ETF inflows will sustainably rebound until traders crystalize a turn in the Fed tightening cycle and/or there is consensus on a U.S./global recession," said commodity analysts at Citi in a research note.
|Hedge funds remain bearish on gold for fifth straight week|
Analysts at TD Securities expect gold’s new bullish momentum will be short-lived in the face of more hawkish posturing from the Fed.
"We expect the FOMC to deliver its third consecutive 75bp rate hike, bringing the policy stance decidedly above its estimate of the longer-run neutral level. We also look for the Committee to provide more hawkish signals through the update of its economic projections and for Chair Powell to build on his Jackson Hole message. In this sense, we see the potential for continued outflows from money managers and ETF holdings to weigh on prices moving forward," the analysts said in a note.
Hansen said that while gold faces continued headwinds from rising interest rates, he added that along with safe-haven demand, he also sees gold as an important hedge against a policy mistake as the central bank will be unable to get inflation pressures under control.
"The market is significantly mispricing the Fed's ability to bring inflation under control. Markets are very optimistic that the Fed will be able to bring inflation back down to 2%, but the question is: will the Fed be able to kill growth enough to bring inflation back down to 2%," he said. "However, gold will remain under pressure until the market starts to smell a peak in interest rates."