FX.co ★ Gold prices edge lower

Gold's rally halted in the middle of the trading week. Yesterday, gold prices came under pressure from several unfavorable factors at once and collapsed.

The bullish run of the precious metal lasted four days. This period reminded many of the impressive rally of 2020, when gold prices rose above $2,000 for the first time in history.

Since then, this mark has been out of reach for the asset. However, this week, gold has managed to break through it again and approached the record high of the pandemic year.

The driving factor for the metal was an escalation of the Russia-Ukraine military conflict, which led to unprecedented sanctions against Moscow.

The total isolation of Russia, the world's third-largest oil and gas supplier, raised concerns about a sharp rise in energy prices throughout the world.

The situation sparked worries that a potential rise in prices could lead to another surge in inflation. Against this backdrop, market players shifted their focus to gold as one of the best hedging instruments. As a result, the asset broke above $2,000.

Besides, gold was supported by statements made by the US and Britain's officials this week to ban imports of Russian oil. The risk that global markets could face energy shortages has forced many investors to reconsider their portfolios in favor of oil and precious metals.

On Tuesday, gold soared by 2.4% and neared a 19-month high. However, on Wednesday, the quotes fell rapidly, erasing early gains.

On March 9, the precious metal slid by 2.7%, or $55.10. The asset closed the session at $1,988.20. What was the reason for such a steep dive?

Oil production to increase

On Wednesday, the United States urged global oil producers to increase production. In response, the United Arab Emirates, one of the largest oil producers, said it would persuade other members of OPEC+ to support its decision to boost oil output.

If this initiative is approved, then the problem with oil supply to world markets, caused by sanctions against Russia, will be partially resolved.

An increase in supply means a decline in oil prices. Therefore, such a prospect had a negative impact on the quotes. Thus, Brent crude oil fell to $105.91 from $131.50 per barrel. Notably, at the beginning of the week, the asset reached $138.03, its highest level since July 2008.

Lower oil prices ease concerns about high and prolonged inflation, which is an unfavorable factor for gold.

Risk appetite returns

A sharp drop in oil prices allowed buyers to enter the equity markets. Yesterday, three key US indices halted their slide and showed solid gains.

The Dow Jones Industrial Average rose by 2%. The S&P 500 index jumped by 2.6%. The NASDAQ Composite added 3.6%.

In addition, demand for other risky assets such as cryptocurrencies also increased. Yesterday, bitcoin soared by 8% to over $42,000.

However, iIncreased risk appetite has an adverse effect on safe-haven assets, including gold.

Signs of conflict de-escalation?

Increased demand for risky assets can be also attributed to today's talks between Russian Foreign Minister Sergei Lavrov and his Ukrainian counterpart Dmytro Kuleba.

Officials are set to meet on neutral territory - in Turkey. Recep Tayyip Erdogan, the President of a host country, suggested on Wednesday that as a result of these negotiations, the conflict parties could agree on a ceasefire.

The recent statement by Ukrainian President Volodymyr Zelensky also gives hope for a possible de-escalation of the conflict. He said that he had "cooled down" about Ukraine's bid to join NATO.

Easing geopolitical tensions contribute to the negative dynamics of gold.

Locking in profits

Experts see locking in profits as another reason for a rapid drop in gold prices. Investors hurried to sell the metal at an attractive price, fearing a repeat of the nickel scenario on the London Metal Exchange.

This week, prices for the silver-white asset have doubled due to the escalation of the Russia-Ukraine conflict. The London Metal Exchange has been forced to suspend all trading in its nickel contract after prices went into chaotic overdrive.

Gold may resume rally

Most analysts believe that the gold market could face high volatility in the coming days.

Turbulence may be caused by the ongoing geopolitical uncertainty as well as uncertainty about global oil supply.

"Coordinated efforts to tackle the global energy crisis will help ease some of the pressures we've seen, but the key to risk appetite will depend on how long the war in Ukraine lasts," analyst Edward Moya said.

A recovery in demand for stocks and cryptocurrencies "seems premature given the short-term supply disruption risk remains extremely elevated," experts note.

According to market analyst Khan Tan, gold promises to post more gains as the geopolitical tensions remain high and uncertainty looms over the global economy. These concerns are likely to support safe-haven assets in the near term, he added.

"If markets perceive a greater risk of a global recession, perhaps triggered by a policy error from a major central bank, that could translate into further demand for safe-haven assets," the expert stressed.

Now investors are awaiting the Fed's final decision on interest rates. The US regulator is set to announce it at the meeting on March 16. Earlier, the central bank said it would most likely raise interest rates by 25 bp this month.

However, some experts consider that the Fed may still become more aggressive in its stance on interest rate hikes if February consumer prices post a significant increase. The latest inflation data for the previous month will be published today. Thus, the inflation data is another factor that will determine the future of gold prices.