Investors flocked to gold futures on Friday as airstrikes in Yemen by the U.S. and U.K. heightened tensions and increased the precious metal’s appeal as a safe-haven investment.
Escalating Geopolitical Tensions
The U.S. and British forces conducted joint strikes on targets in Yemen in response to Houthi rebel attacks on shipping vessels in the Red Sea. Adrian Ash, director of research at BullionVault, highlighted that these strikes significantly raised the threat of wider tensions and potential major power conflicts.
Impressive Surge in Gold Prices
During Friday’s trading, gold futures for February delivery climbed $38, or 1.9%, to $2,057.20 per ounce on Comex. This notable surge marks the largest daily increase for gold prices since December 14th.
Risk Aversion Spurs Gold Demand
The recent airstrikes have instigated a sense of risk aversion among investors, leading to a sharp increase in gold prices. Jim Wyckoff, senior analyst at Kitco.com, emphasizes the keen interest in gold due to this heightened risk sentiment.
Global Influences on Gold Market
While geopolitical violence may have played a role in the rally, it is worth noting that gold prices are also influenced by weak U.S. and Chinese inflation data. Despite rising stock markets and bond prices globally, gold appears to be driven more by economic indicators rather than geopolitical events.
In summary, the escalation of geopolitical tensions in Yemen has caused gold prices to rally, attracting investors seeking a safe-haven asset amidst uncertain times.
China’s Producer Price Index Sees Decrease in December
China’s producer price index (PPI) experienced a decline of 2.7% in December, marking the 15th consecutive month of decrease. A similar trend was observed in the United States, where the PPI fell by 0.1% for the third month in a row. These figures indicate a global pattern of decreasing producer prices.
Gold Prices React to US Consumer Price Index Rise
After a 0.3% increase in the US consumer price index (CPI) in December, which was the largest gain in three months, gold prices initially dropped to four-week lows. However, prices quickly rebounded due to the producer price index miss. This demonstrates the significant impact of Federal Reserve rate-cut expectations on gold prices.
Inflationary Pressures Addressed by Bond Traders
Despite the recent rise in oil prices prompted by US-led action in the Red Sea, bond traders remain cautious regarding inflationary pressures. They anticipate further easing of these pressures throughout 2024. As a result, the yield on the 10-year Treasury experienced a decrease from 2.974% to 3.951%.
Gold Market Vulnerability
While gold prices have been rising in response to market factors, it is important to note that they are as vulnerable as stocks and bonds to changes in sentiment. Ash, a market analyst, suggests that as Fed funds futures are currently priced for six rate cuts in 2024 (twice the number predicted by the Federal Reserve), we can expect push-back from Fed officials and increased volatility in gold and other rate-sensitive markets leading up to the Fed’s January meeting.
The next scheduled meeting of the Federal Reserve is set to take place on January 30-31, where these issues will be further discussed and evaluated.
