Gold has been methodically moving towards high prices since January 31, gaining more than $100 per ounce in two weeks. If this trend continues, it will be a 180° reversal compared to the price decline that occurred in 2021. Last year, gold prices did not change even though inflationary pressures increased. That year was the sharpest annual decline for gold since 2015.
The main driving force behind the precious metal's growth this month was the inflation rise. With inflation at a 40-year high and no quick containment solution, this is likely to continue to have a major impact on gold, boosting the precious metal throughout the year. Moreover, geopolitical tensions added support, so we could see gold prices retesting the all-time high reached in August 2020 when the price peaked at $2,076 an ounce.
A unique set of fundamentals are driving gold upwards. The recent surge is directly related to geopolitical tensions – as long as this continues to grow, the likelihood of a peaceful solution will decrease. And while all sides hope for a diplomatic solution, it has now turned into a war of words and accusations between Ukraine, NATO, and the United States. Another war of words escalating tensions took place yesterday when Western officials claimed that troops from the border of Ukraine are not yet withdrawing.
Since there is no concrete certainty that geopolitical tensions in Eastern Europe will calm down peacefully through diplomacy, it is logical to think that the current inflationary pressure is likely to further rise.
The publication of the producer price index last week confirmed that inflation continues to get out of control. An increase in wholesale prices precedes an increase in retail prices since corporations that produce goods and services will at some point shift their high costs to the consumer.
The current geopolitical and economic environment poses unique challenges that will be difficult to resolve in any time frame at best, so the possibility of gold retesting its all-time high remains real and plausible.