Gold kicked off a new week with a sharp drop. Analysts believe that it is extremely favorable to buy gold now when its price is decreasing. In the short term, gold is highly likely to resume its rally.
Last week, the precious metals market experienced high volatility. However, following weekly results, gold managed to rise by 0.9%.
According to analysts, gold prices are volatile now due to geopolitical woes as well as the upcoming Fed meeting. The regulator will finally announce its key rate decision.
The Fed meeting will be held on March 15-16. Traders expect the watchdog to hike the benchmark rate by 25 basis points.
However, they also do not exclude a more aggressive tightening as economists forecast a new surge in inflation.
Last week, the US unveiled its consumer price index. In February, the annual inflation rate jumped to 7.9%, the highest in four decades.
Last Friday, the University of Michigan Inflation Expectation report was revealed. US consumers expect a 5.4% increase in 2022, which is much higher than the previous estimate of 4.9%.
Inflation is likely to soar due to the Russia-Ukraine conflict. The sanctions imposed by Western countries in response to Russia's special operation in Ukraine will lead to an even bigger increase in commodity prices.
Last week, pol prices exceeded $100 per barrel, approaching the highest level since 2008. Apart from that, nickel hit a new all-time high, having risen by more than 3 times. Some exchanges were forced to halt nickel trading.
Disruptions in global supply chains caused by the confrontation between Russia and Ukraine could contribute to a new rise in inflation. Therefore, the Fed will have to take a more aggressive approach to curb its growth.
Expectations of the first-rate hike by the Fed pushed the 10-year US government bond yield to almost a monthly high at the beginning of the new week.
A rise in US Treasuries exerted pressure on gold. Gold prices declined by 0.5% on Monday morning.
At the time of writing this article, gold was trading at $1,975.70, while last week it reached an intraday high of $2,078.
Unlike investors who are afraid of a sharp rate increase, many analysts are confident that the Fed is unlikely to hike the benchmark rate by 50 basis points at its March meeting.
To avoid recession, the regulator is likely to choose a more cautious approach to normalizing monetary policy.
It will be extremely bullish for gold, especially amid high consumer prices as gold is considered one of the best hedge instruments against inflation.
"A pullback correction is good. It is testing the strength of the market. Gold will continue to march higher to the $2,050 area. I don't think that a rate hike next week is going to hurt the market. Now that we have the big breakout, I remain bullish. The uptrend is still intact. And right now, it is a good buying opportunity," RJO Futures senior market strategist Frank Cholly said.
At the same time, Cholly stresses that in the coming days there may be an increase in volatility in the gold market. He predicts that during this week gold is likely to be trading in the range between $1,960 and $2,050.
Many other analysts also assume that gold as a safe-haven asset will continue to grow amid geopolitical tensions.
The rise in gold prices will be facilitated by the large-scale humanitarian crisis unfolding in Europe, soaring inflation, and the risk of a drop in the global economy.