Gold prices dipped from 8-month peaks in mid-February on reports some Russian troops near Ukraine returned to their bases, easing worries over risks of an invasion.
Some troops in Russia’s military districts adjacent to Ukraine are returning to base after completing drills, Russia’s defense ministry was quoted as saying on February 15.
The news also helped strengthen the pound against the dollar in which gold is denominated. Previously heightened concerns over a possible invasion had supported the dollar, seen as a safe-haven currency.
Gold was down 1.3 percent to $1,846.21 per ounce on February 15, after falling from $1,879.48, the highest since June 11.
Fears of a Russian invasion of Ukraine had contributed to the recent strength in gold, which can act as a safe haven during times of geo-political turmoil.
“Geopolitical factors – notably the hysteria, as President Putin describes it – over a possible invasion of Ukraine by Russian armed forces, have given something of a boost to gold,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.
“If Russia does invade, then this would likely drive more investors into gold as a safe haven.”
Gold savers also focused on U.S. monetary policy, amid a debate about how aggressively the U.S. central bank, the Federal Reserve, may move to raise interest rates in order to control a surge in inflation, which is now running at an annualised rate of around 7.5 percent.
Aggressive moves to raise rates could weigh on gold: a climate of higher U.S. interest rates erodes the appeal of non-yielding gold, as alternative assets may have stronger returns.
For UK gold savers, the stronger pound against the dollar will make it cheaper to accumulate the yellow metal.
The pound traded at $1.35625, 0.25 percent up on the day and above a one-week trough touched on February 14 at $1.34950 as fears over a Russian invasion of Ukraine buoyed the dollar.
A key focus now will be the extent to which the Bank of England will continue to raise interest rates after two rate rises from historic lows since December.
Analysts said UK inflation numbers due out on February 16 should provide a better sense of the scale of further monetary tightening likely from the UK central bank in the coming months.
Many analysts believe that the UK base rate could rise to 1 percent this year, from 0.5 percent currently, possibly underpinning sterling against the dollar.
Frequently asked questions
Why did gold prices experience a sudden drop in mid-February?
Gold prices dipped from their eight-month peak on 15 February due to reports that some Russian troops near Ukraine were returning to their bases. This development eased immediate worries and fears over a potential invasion. Prior to this, heightened geopolitical tensions had driven investors toward the safe-haven asset, pushing prices up to an eight-month high of $1,879.48 per ounce.
As geopolitical anxieties briefly subsided on news of the troops returning to base after completing military drills, gold fell by 1.3 percent to $1,846.21 per ounce. Additionally, this geopolitical relief helped strengthen the British pound against the US dollar. Because gold is denominated in dollars, a stronger pound made the precious metal cheaper for UK-based buyers, further impacting the overall market dynamics and pricing of gold on that day.
How do geopolitical tensions between Russia and Ukraine affect the gold market?
Geopolitical tensions generally boost the gold market because gold is widely viewed as a reliable safe-haven asset during times of global political turmoil. When concerns about a potential Russian invasion of Ukraine intensified, investors rushed to buy gold to protect their wealth. This increased demand pushed the metal’s price to its highest level since June of the previous year.
According to market commentators, the anxiety over possible military action provided a direct lift to gold prices. Experts note that an actual invasion would likely drive even more global investors into gold, further driving up its value. Conversely, any signs of de-escalation, such as troops returning to their home bases, tend to reverse this trend. When tensions ease, investors shift away from safe havens, causing gold prices to quickly decline.
What impact does US monetary policy have on global gold prices?
US monetary policy has a major influence on gold prices because the metal is denominated in US dollars and does not yield interest. Currently, gold savers are closely watching the US Federal Reserve as it debates how aggressively to raise interest rates to combat high inflation. US inflation has recently been running at an annualised rate of around 7.5 percent, putting pressure on the central bank to act.
When the Federal Reserve moves aggressively to raise interest rates, it generally weighs heavily on the price of gold. A climate of higher interest rates erodes the natural appeal of non-yielding assets like gold. This is because rising rates make alternative, yield-bearing assets more attractive to investors, who can achieve stronger guaranteed returns elsewhere, prompting them to move capital away from precious metals.
Does a stronger British pound benefit physical gold buyers in the UK?
Yes, a stronger British pound benefits physical gold buyers in the UK by making the precious metal cheaper to accumulate. Because gold is globally priced and traded in US dollars, the exchange rate between the pound and the dollar directly dictates the local purchasing power. When the pound strengthens against the dollar, UK buyers need fewer pounds to buy the same amount of gold.
For instance, when easing geopolitical fears strengthened the pound to $1.35625, it rose above its previous week’s trough of $1.34950. This currency shift was highly advantageous for domestic savers. A robust sterling lowers the barrier to entry for UK investors looking to build their physical gold portfolios, allowing them to purchase larger quantities of the yellow metal for the same sterling outlay.
How might upcoming Bank of England interest rate decisions affect sterling?
Upcoming interest rate decisions by the Bank of England are expected to play a significant role in determining the strength of the British pound. Following two rate increases from historic lows since December, the market is highly focused on how much further the central bank will go. Many financial analysts believe the UK base rate could rise to 1 percent this year, up from its current level of 0.5 percent.
If the Bank of England continues to raise interest rates, this monetary tightening is likely to underpin and strengthen sterling against the US dollar. To gauge the scale of future rate hikes, investors are closely watching UK inflation data. Higher domestic interest rates generally attract foreign capital, boosting demand for the pound and helping UK buyers purchase dollar-denominated assets, including gold, at a more favourable rate.
