Geopolitical tensions have supported gold prices recently, but not this past week. It ended with a steep fall. What should we expect from prices this week? Last Wednesday, the US Federal Reserve announced that it would raise rates by a quarter of a percentage point to 0.25-0.5% as part of its fight against record-high inflation. For fear of a recession, the US central bank has hesitated to take more aggressive measures. However, even a small rate hike is now seen by investors as paving the way for a tightening of Fed policy. Therefore, the move has had a negative impact on gold quotations.
The precious metal fell by 2.8% last week. This was the worst weekly result since late November. Even the geopolitical factor, which recently pushed the price above $2,000, did not help the bullion. Gold ended Friday's session at $1,929.3, down $13.9, or 0.7%, from the previous close. The asset continues to move lower this morning, under pressure from a hawkish Fed stance.
However, right now there are several tailwinds in the gold market that could act as catalysts for growth. First of all, analysts point to another escalation of the Russo-Ukrainian conflict. On Monday night, Ukrainian Deputy Prime Minister Iryna Vereshchuk rejected Russia's demand to surrender Mariupol, whose residents continue to be held hostage to a major humanitarian disaster. Following this announcement, the markets have returned to an anti-risk sentiment. Also contributing to the sell-off are the rising number of COVID cases in China, the suspension of trading in shares of Chinese property developer Evergrande on the Hong Kong stock exchange and the recent attack on Saudi Arabia by Yemeni Hussein insurgents.
At the moment, the geopolitical situation remains very tense. The world is on the brink of another armed conflict. On Sunday, the Houthis, who are backed by Iran, attacked a number of sites in Saudi Arabia with missiles and said they would soon launch a large-scale military operation against the country. Against this backdrop, US stock indices halted their 4-day uptrend. Risk aversion, according to analysts, may spur investors' interest in safe haven assets, including gold, this week. Experts are also drawing attention to a meeting between NATO allies and US President Joe Biden in Brussels, which is due to take place on Thursday.
The Russo-Ukrainian conflict will be on the agenda. Markets expect discussions on further steps for a ceasefire in Eastern Europe to lead to new sanctions against Moscow. This will help support gold prices. Strategist Bart Melek said that there is no single factor that is more important than the situation in Ukraine right now. The analyst believes that the confrontation between the West and the East will continue to be the main driver for commodities. As such, he expects gold to be able to break through the $2,000 mark again this week.
He added that the only question is whether it can hold there. If the Fed's rhetoric becomes too hawkish, the precious metal will be highly volatile and start to sell off. Notably, US central bank governor Jerome Powell is scheduled to speak again on Wednesday. Markets expect his new comments to give a clearer picture of the Fed's future monetary policy course.
