Gold Prices Reclaim Ground as Investors Seek Safer Options

In February, gold suffered a temporary dip in prices, showing its worst performance since June 2021, though as we spring into March, prices show promising growth. A moment of strength in the U.S. dollar reduced investor interest in gold throughout February, though, clearly, this deflation trend was short-lived. As the U.S. dollar continues weakening, gold gets back on track as the safe haven investment choice for buyers protecting their purchase power amidst a failing economy.

Gold entered February at a stellar price of $1,928, exceeding many analyst predictions. By the end of this month, it fell $97 to $1,831, displaying a 5% drop. The rate at which it fell was the worst recorded price drop since June 2021.

Halfway through the first day of March, gold reached $1,840 per ounce, a $9 increase in one day, before falling again to the high-$1,830s. By March 3, the precious metal increased again to $1,846, displaying momentum in the positive direction.

The primary factors influencing these price fluctuations are the U.S. Federal Reserve actions. The Federal Reserve officially commenced its deflation strategy earlier this year, right before February, in fact, to combat the falling U.S. dollar value. The primary action within this strategy involves hiking interest rates to reduce demand and rapid price growth.

Many investors and analysts took the Fed’s claims lightly and did not think the hiked interest rates would come any time soon. Surprisingly, the Federal Reserve started strong with a 25 basis point increase along with announcements of more to come soon.

Gold typically doesn’t perform as well with high interest rates and a strong U.S. dollar. With the onset of these Fed actions in February, many investors pulled away from their gold purchases, which likely contributed to the dip in prices. Though as the month came to a close with a continued climb in interest rates and poor economic conditions despite the Federal Reserve’s actions, investors turned back to gold once again.

Whether or not inflation will improve or worsen in the coming months is a complex question that no one can answer with certainty. The same goes for how the price of gold will fluctuate. What we do know is that the two will likely go hand-in-hand.

Peter Grandich from Peter Grandich & Co. explains in an interview with Investing News that because the paper market has largely repositioned from Western nations to the east, gold’s prices will remain secure as pressures from bears taking advantage of downside pressures ease.

The second reason Grandich believes gold will continue moving upward is “the unbelievable amount of purchasing done by central banks.” In 2022, central banks purchased a total of 1,136 tons of precious metals, displaying the highest total purchase amount since 1967. “When central banks are big, big buyers, it’s kind of like the old saying, ‘Don’t fight the Fed’ — well, don’t fight the central banks when it comes to gold,” he explains.

Jeff Wright, Wolfpack Capital’s chief investment officer explains in an interview with MarketWatch that the climb in gold prices can be attributed to a “combination of robust economic data from China and a lower U.S. dollar across the major currencies.”

The manufacturing data in China exceeds estimates “leading the China reopening narrative at the moment,” he explains. The manufacturing purchasing managers’ index in China increased from 50.1 in January to 52.6 in February, while the non-manufacturing PMI increased from 54.4 to 56.3.

Wright explains that the U.S. dollar’s weakness also contributes to euro strength, “factoring in higher inflation data in the European Union and speculation of faster EU central bank interest-rate increases.”

While these additional factors may impact gold’s performance, clearly the largest consideration based on February’s performance will be Fed actions. Neel Kashkari, the Federal Reserve president in Minneapolis explains that he’s “open-minded at this point about whether it’s 25 basis points or 50 basis points.” Conversely, the president in Atlanta, Raphael Bostic, wants to increase interest rates until reaching the target range of 5% to 5.25% (it’s currently at 4.5% to 4.75%).

The latest U.S. dollar index performance from Wednesday shows a dip of 0.3%, allowing room for gold to grow. “Gold has found some support with the price edging back up to $1,830 an ounce after a challenging February in which the precious metal slumped to its lowest level for two months,” Rupert Bowling, an analyst from Kinesis Money, explains.

As always, investors should speak with their financial advisors before making any portfolio decisions.

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