Fundamental Analysis

Gold Prices Rally Amid Geopolitical Uncertainty

  • Investors fear increased oil prices could lead to a spike in inflation.
  • Central banks have increased purchases of gold, raising demand.
  • Gold prices rose despite a rally in US Treasury yields and the dollar.

On Tuesday, gold prices rallied to a new high on safe-haven demand amid ongoing geopolitical tensions. Prices rose despite an increase in Treasury yields after upbeat US data. 

Gold rallies (Source: Bloomberg)

Gold rallies (Source: Bloomberg)

Tensions in the Middle East and between Russia and Ukraine have pushed some investors to hedge against any escalation affecting other markets. At the same time, with Ukraine attacking Russian refineries, oil prices have increased. Investors fear that this increase could lead to a spike in inflation. Notably, gold is a good hedge against inflation.

On the other hand, central banks have increased purchases of the yellow metal, raising demand. The central bank in China has contributed to a surge in demand as it tries to replace risky currencies in its portfolio.

The increased demand has kept gold prices high despite a rally in US Treasury yields and the dollar. On Monday and Tuesday, the US released upbeat economic data, leading to declining expectations for interest rate cuts. US manufacturing activity surged past the 50 mark in March, separating contraction and expansion. This increase indicates high economic demand and is not what the Fed wants to see. High demand could lead to a spike in inflation, which would undo some of the work the central bank has already done. Consequently, investors are rethinking the likelihood of the first rate cut in June.

Meanwhile, job openings in the US rose slightly in February, indicating high demand in the labor market. However, the number of job openings for every unemployed person fell, showing an increase in the unemployment rate. 

A robust economy puts the Fed in a cautious position, as cutting rates too early could lead to a spike in inflation. Therefore, more positive data from the US could push back the timing of the first rate cut. At the same time, it could reduce the number of cuts expected in 2024.

Despite this, some policymakers have held on to the outlook for three rate cuts. Notably, the Fed’s Loretta Mester and Mary Daly said cutting interest rates three times this year would be reasonable. Consequently, gold traders hope the Fed will keep its dovish outlook despite upbeat data. However, the nonfarm payroll could change this outlook. Still, with so many other factors affecting the markets, gold is rising.