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At the end of January this year, gold prices were at their highest in two months and gold bullion had gained over 4% in value since November. Traders were interested in the safe haven asset because the possibility of a Russian invasion of the Ukraine had already become real, and because the International Monetary Fund (IMF) had reduced its forecast for the year’s economic growth. The popularity of the metal before tensions began in Ukraine puzzled some analysts, because the prospect of hiked interest rates often weighs on gold prices, but the reason seemed to be that traders foresaw a recession could be sparked off by Fed rate hikes. “Gold is simply becoming a Fed policy mistake hedge”, in the words of Nicky Shiels of MKS PAMP. Spot gold was holding around $1,844.80 an ounce by the end of January, but one month later, with tensions in Ukraine increasing, gold had risen to its highest value since last June, with traders preferring the metal as a haven over Bitcoin.

Gold was up over 3% for the year, compared with Bitcoin’s loss of 16%. Further supporting gold prices was high demand for the physical metal in China and India (Cargoes from Switzerland to China had gone up by a factor of five in January), and the likelihood of more central bank purchases. By the end of the first week of March, gold had topped the $2,000-an-ounce mark and commodities markets were in turmoil, with the Russia/Ukraine invasion underway and US warnings of a ban on Russian oil. This was despite the surging of the US dollar to its highest peak since mid-2020, which would normally hold prices down.

When April was two-thirds through, gold prices dropped, leaving spot gold at $1,951.60 on the 21st of the month, one cause being the rise in US bond yields. Still, gold had performed strongly so far in the year, having gained more than 6%, riding on the back of a surge in the popularity of gold ETFs. Let’s take a look at the key factors, such as the high cost of living, that may affect the price of such commodities as gold. A must read before you trade gold with iFOREX as CFDs.

Typical Drivers of Gold Prices
As we mentioned, when rate hikes are expected from the US Federal Reserve, this can tend to pressure gold prices downward, since gold doesn’t bear interest. This isn’t always the case, though, because “Hiking cycles aren’t necessarily bearish for gold and it depends on how real rates respond”, explained Nicky Shiels. As we also mentioned, a stronger dollar can weigh on the metal, because this makes it less affordable for international buyers. However, gold’s safe haven appeal was strong enough in March and April to outweigh this factor and keep prices buoyed. More obviously, when demand is high, prices go up, which is why purchasers’ moods in China and India, where gold consumption is high, make a big difference as well. Finally, the sense that geopolitical tensions are worsening will often accelerate demand for safe havens like gold.

Key Drivers in Coming Months
At the end of April, a crucial point on which gold sentiment hinged was the question of whether the Fed will be able to raise interest rates in such a way as to curb inflation but also avoid damaging the economy. Traders who felt this was possible did not feel a need to focus on gold, which contributed to the drop in prices. Traders who doubted the Fed’s ability to pull this off kept their money in gold, which supported prices. “You could argue gold has very heavily priced the Fed not being successful”, said Marcus Garvey of Macquarie Group Ltd.

The Chinese struggle against Covid and the development of the Ukraine conflict will be big factors in determining world economic recovery, and so influence gold prices. The high cost of living due to exaggerated inflation will be pressuring the Fed to be hawkish, and the consequences for gold will depend on their success in controlling prices. “Inflationary pressure can be positive for gold if central banks are unable to keep the rally of prices under control”, explained Carlo Alberto De Casa of Kinesis. The strong dollar as April ended – fuelled by anticipation of quicker rate hikes – was holding gold down, and this could also continue to be a key factor.

Times Ahead
The ongoing crisis in may will continue to strongly influence commodities markets around the world, and this, in turn, could exacerbate inflation and push up the high cost of living. As we’ve seen, the effect on gold will depend on a variety of factors which will have to be watched by all those planning to trade gold with iFOREX as CFDs.

In the opinion of Carsten Menke of Julius Baer Group Ltd, “The demand for gold from safe-haven seekers should fade”. Not so according to Luc Luyet of Pictet Wealth Management, who believes high inflation and slow economic growth “Should favour gold” in the long term. Therefore, with such conflicting opinions at stake, it’s important to get all perspectives before you trade gold with iFOREX as CFDs.