By Swann Collins, investor, writer and consultant in international affairs. Eurasia Business News – February 16, 2022
Investor fears that the US Federal Reserve will not be able to control inflation are driving gold prices higher, despite a sharp rise in US bond yields, which should usually lead to lower prices for the yellow precious metal. Investors think that the Fed is late in its decisions and actions and can barely cope with the high inflation trend. High annual inflation in the United States (7.5% in January 2022), the Euro zone (5.1% in January 2022) and in Russia (8.73% in January 2022) drives the fears of investors and families. They are seeking hedge to protect their wealth and purchasing power.
On the sidelines of the soaring energy, transport and consumer prices, geopolitical tensions in Europe and Asia are adding to the uncertainties and drive up gold prices.
Such worries will boost the inflation expectations in the coming months and will put pressure on the political stability of some Western democracies. Inflation is now a key issue in a country like France, which will hold presidential election in April. Officially, annual inflation in France hit 2.9% in January 2022. In Germany, the return of high inflation is debated in all newspapers and fuel critics against the quantitative easing policies of the European Central Bank. Annual inflation rate in Germany was confirmed at 5.3% in December 2021, the highest rate since June of 1992.
The hard truth is that the US Fed can’t brutally rise interest rates without destroying the financial market. Any rate hike to come in 2022 will have no choice but to be very moderate. Therefore, high inflation would stay in here over 2022. This context fuels the growth of gold prices.
On February 10 gold prices reached $ 1,827 per troy ounce, gaining 1.05%. Silver prices hit $ 23.19, gaining 2,98 %. On February 16, gold prices hit $ 1,854 per troy ounce. Silver prices reached $ 23.45.
The US Federal Reserve must accelerate the pace of raising interest rates to fight rising inflation, but it can do so without destroying financial markets, St. Louis Fed Chairman James Bullard said on Febuary 14 in an interview with CNBC.
The central banker added that “he would like to see the Federal Open Market Committee raise the policy rate by 100 basis points by July 1 […].”
James Bullard then noted that year-over-year headline CPI inflation in January was at a rate that hadn’t occurred in 40 years. “Our credibility is on the line here, and we do have to react to data. However, I think we can do it in a way that’s organized and not disruptive to markets,” he said.
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During the interview, the St. Louis Fed Chairman also said that he wants Fed balance sheet runoff to get going in the second quarter and that he doesn’t see geopolitical uncertainty as a leading U.S. macroeconomic issue at least at this point.
Higher interest rates are generally considered bad news for gold as they drive up bond yields. But an aggressive rate hike could ultimately be positive for gold. That will increase the risk of Fed policy error while raising recession risks. Such a situation will help gold prices to grow.
Retail sales of gold bars and coins rose to an 8-year high last 2021 and are expected to remain strong, reported the World Gold Council (WGC), as demand in key markets like India and China rebounded. However, gold could be in trouble if bond yields – still extremely low by historical standards – turn positive.
Gold consumption in China in 2021 increased by 37% compared to 2020 and amounted to 1,120.9 tons, reported the China Gold Association (CGA). The indicator increased even compared to the “pre-Covid” 2019, while the dynamics was 12%.
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Including demand from Chinese jewellers has grown by almost one and a half times by 2020, to 711.29 tons while investment demand for gold bars and coins increased by 27%, to 312.86 tons. Both of these indicators also increased compared to 2019 – by 5% and 39%, respectively.
Chinese demand for gold was also driven in 2021 by the serious financial difficulties of the Chinese real estate developer Evergrande group. Evergrande had missed loan payments to at least two bank creditors. Global markets feared in September and October a default of the company and its consequences for banks and lenders. Evergrande is one of the largest property developer and China and is indebted in an amount of $ 300 billion. Three years ago, Evergrande was the most valuable real estate company in the world in terms of share market value and had a very intricate structure with many subsidiaries and holdings. Evergrande Real Estate owns more than 1,300 projects in more than 280 cities across China.
On February 11, the Russian central bank raised the Russian key rate by 100 basis points, to 9.50% per annum. This move was expected by the market. Some analysts did not rule out both more cautious (up 50-75 bp) and more decisive moves (125-150 bp), but it was the 100 bp forecast that was the baseline. Now the Russian key rate has reached a record level since the end of April 2017. Then it was 9.75%, in early May it was reduced to 9.25%. This move boosted gold prices that reached $ 1,862 per troy ounce, gaining 1.98% on February 11 ! Silver prices hit $ 23.65, gaining 1,99%.
On February 10, gold prices hit $ 1,827 per troy ounce today, gaining 1.05% in one day, while silver prices reached $ 23.19 per ounce, gaining 2.98%.
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About the author : Swann Collins is an investor, writer and consultant in international affairs. He has published over 100 articles specializing in economy, finance and investments.
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© Copyright 2022 – Swann Collins, investor, writer and consultant in international affairs.