A trifecta impact from the negotiations between Ukraine and Russia, the rate hike and rising bond yields have dealt a heavy blow to the gold price.

By Pritam Patnaik

Gold prices remain flat after a tumultuous week in which we saw world market prices plummet to a low of $1895. A trifecta impact from the negotiations between Ukraine and Russia, the rate hike and rising bond yields have dealt a heavy blow to the gold price. That said, did it manage to erase the shine from the metal? The answer to this question lies in some crucial factors that will arise in the near future. On an immediate basis, the FED rate hike and commentary were closely watched. On Wednesday, the FED announced a quarter of a percentage point increase in the federal fund rate, lifting that key benchmark from its near-zero level. It was the first rate hike since 2018. The FED chairman also said they plan six more rate hikes to curb inflation. In addition, he said it expects to begin phasing out its massive holdings of government bonds and mortgage-backed securities at an upcoming meeting. None of them were contrary to market expectations. Much of the impact was already priced in. That said, the FED lowered its GDP forecast for the year and raised inflation expectations, leading the market to fear stagflation, which is expected to work in favor of gold.

The start of talks between Russia and Ukraine to reach a diplomatic compromise has not made much of an impression. The initial optimism met reality when news suggested there was a deadlock over Kiev’s proposed neutrality. Also, the pressure exerted by the International Court of Justice, the UN and NATO members on Russia to immediately suspend the invasion of Ukraine creates barriers to successful talks. Furthermore, Ukrainian President Volodymyr Zelenskyy’s demand for the establishment of a no-fly zone for the Allies only exacerbates hostilities. While there seems to be no easy solution to this problem, nothing can be ruled out in politics. When the problems are resolved, there will be a sharp correction, but it will be temporary.

The conflict between Russia and Ukraine has exacerbated already alarming inflation. As a result of the disruptions in economic activity caused by COVID-19, annual inflation in the US reached 7.9 percent in February, the highest level since January 1982. Since the outbreak of the conflict between Russia and Ukraine, commodity prices, further disrupted supply chains and transports. This trend is expected to continue well into this year as inflation drivers have no quick fix. While global central banks and governments will continue their efforts to curb inflation by using all the fiscal and political resources at their disposal, the process will be time consuming. With growth slowing and inflation high, the onset of stagflation is no longer just a thought, but is becoming a reality. This situation is favorable for the gold price.

Given this reality, a correction could be expected due to higher bond yields and the expectation of a resolution to the Russian-Ukraine issue, which will eventually be reached one way or another, with both or one side compromising. This correction will provide investors with a good opportunity to enter the market on a long-term target of $2,000 as the more permanent issue of inflation and growth-induced stagflation will drive gold prices.

(Pritam Patnaik is the Head – Commodities, HNI and NRI Acquisitions at Axis Securities. The views expressed are those of the author. Consult your financial advisor before investing.)


This post Gold price today; Ukraine-Russia talks, rate hike and rising bond yields weigh on yellow metal was original published at “https://www.financialexpress.com/market/commodities/gold-prices-may-correct-if-russia-ukraine-conflict-eases-investors-may-buy-the-dip-for-2000-target/2463868/”

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