The main catalyst for the rally in the precious metal is the conflict between Russia and Ukraine. On Tuesday, tensions have subdued, triggering a sharp decline in gold.
According to the western media, Russia was meant to invade Ukraine on February 16.
Yesterday, there was turbulence in markets as many speculators were concerned about the probability of the so-called invasion. The shares of many companies fell drastically. Investors shifted their attention to safe-haven assets amid geopolitical risks.
The likelihood of Russia's attack on Ukraine increased the demand for gold. At the beginning of the week, it rose by 1.5%, reaching a 3-month high.
In the first half of Monday, the quotes climbed higher amid mixed news headlines. The price soared above the $1,880 mark, the highest level since summer.
However, gold failed to consolidate at the 8-month peak following news about the de-escalation of conflict. As a result, demand for risky assets slightly rose.
Gold nosedived after the Russian Defense Ministry announced that some troops were pulling back from the Ukraine border to their military base. Russian President Vladimir Putin said on Tuesday that Russia is also willing to continue the discussion process. "We are ready to work further together. We are ready to go down the negotiations track," Putin pointed out.
The US stock market rebounded after a 3-day fall amid such statements. Shares of European companies also recouped losses.
Naturally, gold slid down due to risk appetite. On February 15, it closed a decrease of 1%, or $18.30, notching the biggest daily drop in 3 weeks. At the close of the session, gold was trading at $1,851.10.
Analysts assume that demand for gold as a hedge in times of geopolitical risks will remain relatively high because such a conflict cannot end in one day. Everything may change quite quickly. So, despite some cooling-off, the conflict may start again.
Gold may lose momentum due to rising inflation
Another factor that may significantly impact gold is the key rate hike by the Fed. The regulator is likely to change the parameters of monetary policy, taking into account the inflation situation.
Yesterday, the US unveiled the Produce Price Index survey for January. The reading totaled 9.7% on the annual basis. The Core Consumer Price Index jumped to 8.3% against economists' forecast of 7.9%.
Inflation rose due to an increase in the cost of outpatient care in hospitals, as well as a rise in prices for food and cars. Analysts note that this is another sign that high inflation will persist for most of the year.
The Fed is likely to resort to a more aggressive stance due to soaring inflation. The central bank may raise the interest rates by 50 basis points in March.
US Treasuries are sure to grow amid expectations of monetary policy tightening. Yesterday, after the release of inflation data, government bonds jumped sharply by 4.7%, to 2.043%. Naturally, it is also weighing on gold.
This morning, gold continues to move down. At the time of writing this article, futures for April sank by 0.12%, or $ 2.25.
Now, investors are awaiting the publication of the Fed meeting minutes for January. They hope that the report will shed light on how the regulator plans to hike the key rate.