Gold extended gains on Tuesday, breaking through the $1916 per ounce resistance and climbing up to $1,943 per ounce as investors weighed the economic risks of sanctions against Russia. Severe sanctions against Russia, culminating in the exclusion of Russian banks from the SWIFT system, have triggered fears of a global economic crisis. A risk-aversion sentiment prevailed, as diplomatic talks between Russia and Ukraine on Monday failed to yield any results, driving investors towards safe-haven assets.
Gold price is currently increasing, although it is still far from last week’s $1,974 per ounce level. If the price of gold decreases, however, support may be found at 1,782 per ounce.
US stock markets fell on Tuesday and US treasury yields also went down to six-week lows. Declining yields also boost the price of gold, since they compete directly with gold as an investment, as gold does not pay dividends or interest.
Sanctions against Russia are likely to have a heavy impact not only on the Russian economy, but on the global economy as well, and especially on the Eurozone, which relies on Russia for key imports. The price of oil and other key commodities, such as corn and wheat, is already climbing and prices are expected to climb further as the crisis unfolds, contributing to rising inflation rates in the Eurozone. The price of gold benefits from rising inflation, since it is often used as an inflation hedge.
The effect of rising inflation on gold may be temporary though, as soaring inflation rates may push major Central Banks towards a more hawkish policy. The Fed, the ECB, and the BOE are expected to tighten their monetary policies in the following weeks to months, boosting the value of real yields and putting pressure on the price of gold.
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