The Strategist

Uncertainty pushes prices for gold up

02/20/2019 - 11:06

The cost of gold on the world market on February 18 updated the ten-month high, reaching $ 1,327 per troy ounce. This was facilitated by plans of the US Federal Reserve System (FRS) to stop growth of the base interest rate, as well as high geopolitical risks associated with both US domestic and foreign policy. In such a situation, investors prefer to increase investments in defensive assets.

According to Reuters, the quotations of gold on the world market on February 18 rose to the level of $ 1,327.64 per troy ounce, the maximum value since April 25 last year. Compared with the previous day's close, the gold price increased by 0.5%, and in three days - by almost 1.6%. Prices for other precious metals rose as well. The cost of silver for three days grew by 2.4%, to $ 15.8 per troy ounce, platinum - by 3%, to $ 807 per ounce.

The rise in prices for precious metals is taking place against the backdrop of hopes that the US Federal Reserve may, by the end of the year, abandon tightening of the monetary policy. In 2018, the US financial regulator has raised the base interest rate four times, bringing it to a level of 2.25–2.5%. This year, the markets were waiting for at least two more increases. However, following the January meeting, Fed Chairman Jerome Powell made it clear that the regulator may complete the current interest rate increase cycle, and not just make a short-term pause.

The cost of precious metals has also been supported by increased political risks. At the beginning of the year, there was a shutdown in the United States due to disagreements between the two branches of government on financing construction of a wall on the border with Mexico. This resulted in a partial halt of work of the government and all state services. Only last Friday, representatives of the White House said that Donald Trump had signed a compromise version of the government’s financing bill, which would prevent another shutdown before at least September 30. Political risks have a significant impact on the cost of metals. This is not the only such situation in the United States which ultimately contributed to introduction of a nationwide state of emergency in the States. Additionally, there are still risks of Brexit in the UK, as well as uncertainty about continuation of the trade war between the United States and China.

While the gold market sentiment is optimistic, all of the above risks remain, and an increase in demand for gold has an additional positive effect on the price (an increase in ETF positions, demand from central banks). However, there are risks of reducing tensions between the United States and China. Since the beginning of the year, representatives of both countries have been actively trading. Last week, Donald Trump and PRC Chairman Xi Jinping noted progress in trade negotiations.