Wealth Guide: What has been Golds momentum as focus shifts from geopolitical issues to central banks?

During the start of the Russia Ukraine tensions, Gold rallied sharply as a reaction. However, prices have turned rangebound as market players counter geopolitical issues against central bank monetary policy stance.

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Madhavi Mehta, Associate Vice President, Commodity Research, Kotak Securities wrote in this context, "The surprise move led to a quick shift from riskier assets to safe havens and this pushed gold prices higher. Gold however failed to hold on to the gains and witnessed a brief correction before bouncing back above $1900/oz level." 

In this context it has to be noted that Gold has traded higher this week but still below the highs set in immediate reaction to Russia’s attack. 

The Russia-Ukraine tensions have continued to intensify while talks have failed to result in any breakthrough yet and USA and other countries are increasing economic pressure on Moscow. 

"Gold continues to remain supported by safe haven buying as Russia-Ukraine tensions continue to intensity. Rising commodity prices has also increased its appeal as an inflation hedge," Mehta wrote. 

She further added, "Gold has also benefitted from pick up in investor interest as market players look for alternatives amid increase challenges for equity markets. Gold holding with global ETF’s have jumped to the highest level since March 2021." 

Mehta also pointed out that the upside in gold however remains challenged by how central banks may respond to geopolitical tensions and inflation concerns. Additionally, the gains in gold are also challenged by rise in the US dollar. The US dollar index has jumped to June 2020 highs amid increased safe haven demand due to geopolitical tensions which has more than offset mixed US economic numbers.

In his testimony this week, Fed Chairman Jerome Powell expressed support for a 25 basis point rate hike at the upcoming meeting on March 16 and also indicated that more steps may be needed if inflation remains out of control. However, Fed Chairman also stated that they are keeping an eye on geopolitical developments and may act cautiously.

Mehta observed, "With geopolitical tensions intensifying and lack of aggressively hawkish comments from Fed Chairman, market players have played down possibility that Fed may act aggressively at the upcoming meeting. However, inflation situation has worsened with the rally in commodity prices and Fed and central banks may continue to maintain a cautious tone." 

At present, Gold is hovering above the key $1900/oz level and may remain supported unless there are clear signs of de-escalation in Russia-Ukraine tensions. 

However, at the same time, upside may remain challenged ahead of Fed’s meeting later this month. Given the mixed factors and cautiousness ahead of upcoming central bank meetings, gold may remain in a broad range.