U.S. President Joe Biden unveiled sanctions this week targeting Russias sale of sovereign debt abroad and the countrys elites, after Vladimir Putin recognized two self-proclaimed separatist republics in eastern Ukraine as independent, a dramatic escalation in the standoff. Biden described the move as the start of Russias invasion of its neighbor, but Moscow has denied any plans to invade.
Before demand for a haven took off over Ukraine, bullions resilience had been a mystery to some observers, especially in the light of the Federal Reserve’s imminent tightening cycle. One concern was that the U.S. central bank could run the risk of triggering a recession by increasing rates more frequently and to a higher level than potentially needed to tame inflation.
Whats really driving gold is a sense that the chances of a policy error are increasing with the Fed, said Ross Norman, chief executive officer of Metals Daily, an information portal focusing on precious metals. Theres a sense that the Fed is behind the curve, and when you have to play catch up, you have to put a fairly aggressive move forward in terms of rate-hiking, which a fragile economy may not be well positioned to adjust to.
Gold is also benefiting from some weakening in demand for cryptocurrencies, which are often seen as an alternative fiat hedge, according to Peter Berezin, chief global strategist at BCA Research Inc. Bullion has gained more than 3% this year, while Bitcoin has plunged 16%.
Bullion had a largely lackluster 2021 after charging to an all-time high the year before on the back of ultra-accommodative monetary policy and pandemic support. Now, a rate liftoff is all but certain in March, and JPMorgan Chase & Co. economists estimate increases of 25 basis points at nine consecutive meetings. This could weigh on bullion, an asset that bears no interest.
Gold traders have never lived through a rate hiking cycle amidst high inflation since the 1970s, said Shiels from MKS PAMP. Theres a lot of uncertainty over how this plays out: hiking cycles arent necessarily bearish for gold and it depends how real rates respond. At the end of the day, gold doesnt control its own fate which is the added complexity.
Rising global risks have not been lost on investors whove piled into exchange-traded funds backed by bullion. As of Feb. 18, holdings in SPDR Gold Shares had surged by slightly more than 50 tons from a 20-month low in December.
Other supportive drivers for bullion include physical demand from China and India and the possibility of undisclosed central bank purchases.
The biggest consuming countries are back in full force after an abysmal 2020. Shipments to China from Switzerland, Europes key refining hub, jumped almost fivefold in January to a five-year high. Imports by India accelerated to the strongest level in a decade last year as jewelry sales almost doubled, with the demand outlook remaining bright, according to the World Gold Council.
Meanwhile, central banks added 463 tons of gold to reserves last year, an increase of over 80% from a year earlier, according to the council, which added purchases will continue but at a slower pace. The central banks of Russia and China could look to buy gold in the open market and support prices when real yields spike, Citigroup Inc. said in a Feb. 17 note. We think this has already materialized in 2022, but might not be reported in data yet, the bank said.
Still, the question remains can gold sustain levels around $1,900 an ounce when or if geopolitical tensions ease? UBS Group AGs wealth management unit said in a note last week that a break in the negative correlation between gold and U.S. real rates never really endures, and this time is no different.
The post Gold fights off rising rates, Bitcoin to be haven in tough times appeared first on InvestmentNews.
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