- Spot gold prices reversed sharply from above $2,050 to below $2,000 on Wednesday, falling almost 3.0% on the day.
- A historic decline in energy (and other commodity) prices has led to lower inflation expectations, weighing on gold demand.
Update: Gold (XAU/USD) bears pause around $1,990 in the first Asian session on Thursday, after posting the biggest daily decline in 14 months.
The metal’s earlier decline could be linked to fears that Ukrainian diplomacy could help overcome the geopolitical standoff with Russia. However, the latest headlines from Russia and the White House suggest that noise remains on the table, at least from the side of Moscow, which in turn has been probing gold sellers.
While depicting the mood, Wall Street and U.S. Treasury yields both rallied the day before, but S&P 500 futures are failing to copy recent moves.
In addition to market anxiety ahead of the Moscow-Kiev talks in Turkey, the monthly US consumer price index (CPI) release for February and the European Central Bank’s monetary policy meeting ( ECB) are also keeping XAU/USD traders on edge.
Read: February US CPI Snapshot: Will Searing Inflation Force the Fed’s Hand?
It should be noted that inflation expectations in the United States, according to the 10-year breakeven inflation rate according to data from the Federal Reserve Bank of St. Louis (FRED), reached an all-time high at 2.9 % before falling back to 2.84% at the end of North American trading on Wednesday. session.
End of update.
A historic pullback in energy prices from multi-year highs amid a deluge of bearish headlines including the UAE and Iraq talking about pushing OPEC to boost production and news releases of oil reserves by the United States and its allies, saw market-based measures of inflation expectations plummet and thus demand for inflation protection in the form of precious metals ease. U.S. 10-year breakeven inflation expectations fell back to 2.86% from closer to 2.93% on Tuesday, bringing spot gold prices (XAU/USD) back from highs of the Asia-Pacific session above $2050 per troy ounce to below $2000. At current mid-1990s levels, gold is expected to decline around 2.7% on the day, its worst one-day performance since January 2021.
The prospect of higher production from OPEC, more releases of crude oil reserves and potentially higher exports from Iran and Venezuela if the United States can negotiate effectively could be enough to stifle the recovery short-term oil. This could help ease the acute fears of stagflation that have been so supportive for the precious metals complex of late. But a significant respite from high energy prices (and other Russian-linked commodities) can only come if the Russian-Ukrainian war and Western sanctions come to an end.
Hope that a ceasefire could be in sight when Russian and Ukrainian foreign ministers meet in Turkey on Thursday amid more conciliatory rhetoric from both sides over a potential deal in recent days has backed the appetite for risk on Wednesday and was another factor weighing on gold. But most geopolitical strategists do not see the talks leading to a ceasefire. Somewhat cynically, some believe Russian President Vladimir Putin could be using the talks as a distraction as Russian troops regroup to increase the ferocity of their assault on major Ukrainian cities like Kiev.
Even if Thursday’s best-case scenario materializes and both sides reach a ceasefire, the resulting sharp drop in gold (XAU/USD could drop to the lows of $1900) will not probably won’t last long. . Western sanctions against Russia will not magically disappear. The West will continue to view Russia as a pariah state and will continue its efforts to insulate and decouple from its economy. This means that short-term supply issues related to Russia are unlikely to ease anytime soon, regardless of what happens regarding the war in Ukraine.
Another key event for traders to watch on Thursday is the US Consumer Price Inflation figures for February. The headline CPI should approach 8.0%. While this reinforces expectations of a 25 basis point rate hike from the Fed later in the month and a series of subsequent rate hikes towards neutral (i.e. around 2.0%), the prospect of short-term real rates (interest rate minus annual CPI) turning positive anytime soon remains slim. Indeed, the latest geopolitical events and subsequent commodity price developments ensure that monthly inflation rates will only accelerate in the coming months, keeping the high annual rate at higher levels for longer. Until the Fed gets serious about fighting inflation (i.e. moving short-term rates around the year-on-year inflation rate), gold remains an attractive asset to to possess.