A trifecta impact of Ukraine- Russia talks, rate hike, and increasing bond yield has dealt a heavy blow to Gold prices.
By Pritam Patnaik
Gold prices remain flat after a tumultuous week, where we saw the prices dropping to lows of $1895 in the global markets. A trifecta impact of Ukraine- Russia talks, rate hike, and increasing bond yield has dealt a heavy blow to Gold prices. That said, has it managed to erase the luster of the metal? The answer to this question lies in a few crucial factors that pan out in the near future. On an immediate basis, the FED Rate hike and commentary were keenly watched. On Wednesday, the FED announced a quarter percentage point increase in the overnight federal funds rate, lifting that key benchmark from its near-zero level. It was the first rate increase since 2018. The FED chair further went on to indicate that they plan additional six such rate hikes to reign in the inflation. Additionally, he said that it expects to begin unwinding its massive holdings of government bonds and mortgage-backed securities at an upcoming meeting. None of which was contrary to the market expectations. Much of the impact was already priced in. That said, FED did lower the GDP forecast for the year, and upgraded inflation expectations, thereby reaffirming market fears of setting in of stagflation, which is expected to work in favour of Gold.
The initiation of talks between Russia and Ukraine to arrive at a diplomatic compromise has not made much head. Initial optimism met reality as news suggested a deadlock on the proposed neutrality of Kyiv. Also, the pressure exerted on Russia by the International Court of Justice, UN, and NATO members to immediately suspend the invasion of Ukraine raises barriers for successful talks. Further, the demand of Ukrainian President, Volodymyr Zelenskyy, for imposing a no-fly zone for the allies only accentuates hostilities. While there seems no easy solution to this problem, in politics nothing can be ruled out. In the event of a resolution of the issues, there will be a sharp correction, but it will be temporary in nature.
The Russia-Ukraine conflict has pushed an already alarming level of inflation even higher. Due to the COVID-19-induced disruptions in economic activities, the annualized U.S. inflation hit 7.9 percent in February, the highest since January of 1982. Since the outbreak of the Russia-Ukraine conflict, commodity prices, supply chains, and shipments have been further disrupted. This trend is expected to continue well into this year, as factors inducing the inflation don’t have any quick-fix solutions. While globally central banks and governments will continue their efforts to bring down inflation by using all fiscal and political muscles available to them, the process will be time-consuming. With growth slowing and high inflation, the onset of stagflation is no more just a thought but turning into reality. This situation essays well for gold prices.
Given these realities, there could be correction expected owing to higher bond yields and the expectation of a resolution on the Russia-Ukraine issue, which eventually will be attained one-way or the other, with either both or one side compromising. This correction will give a good opportunity for investors to enter the market for a long-term target of $2000, as the more permanent issue of inflation and growth-led stagflation will propel the gold prices.
(Pritam Patnaik is the Head – Commodities, HNI, and NRI Acquisitions at Axis Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)