FX.co ★ Demand for gold as safe haven asset returns amid inflation fears

Gold rallied on Tuesday, returning above $2,000 per ounce amid soaring inflation in the US. Earlier, the precious metal fell by 2.7% on Wednesday.

Investors focused on US CPI data for February, which was released on Thursday. Inflation rose by 7.9% year-over-year, the highest level since January 1982.

Geopolitical tensions have pushed inflation to a 40-year high, as prices balloon due to the impact of escalation in Ukraine. Supply disruptions caused by sanctions against Russia have already affected American consumers.

Further isolation of Russia could disrupt global supply chains, leading to a price surge for goods and commodities imported from Russia, such as energy resources. This could drive consumer prices in America even higher.

In the meantime, hopes for a diplomatic resolution of the war in the near future are fading.

Yesterday's meeting between Russian foreign minister Sergei Lavrov and his Ukrainian counterpart Dmitro Kuleba in Turkey failed to produce any results. Both sides were unable to negotiate a ceasefire.

In the meantime, the war in Ukraine is escalating. Yesterday evening, Ukraine claimed the Russian air force bombed the experimental nuclear reactor at the Kharkiv Institute of Physics and Technology, raising fears of a nuclear war in Eastern Europe and a global economic crash.

Numerous shares dropped sharply on Thursday, as investors abandoned risky assets.

On the other hand, demand for safe haven assets, such as gold, has increased. The precious metal finished yesterday's session in positive territory thanks to strong support from inflationary and geopolitical risks. Earlier, gold fell by 2.7% on Wednesday.

The precious metal gained 0.6% or $12,20 on March 10, closing at $2,000.40 per ounce. The price of gold has increased by about 1.2% since the beginning of the week.

The asset peaked on Tuesday, when it closed at $2,043, slightly below the all-time high of August 6, 2020 - $2,069 per ounce.

Gold's price dynamics would depend on the course of the war between Russia and Ukraine. If the conflict is not resolved through diplomacy, the West will intensify its severe sanctions against Moscow, increasing inflationary risks.

According to Georgette Boele, senior precious metal strategist at ABN AMRO, crippling economic sanctions against Russia will create further disruptions in the global supply chains of critical commodities, including energy, agriculture, and some industrial metals. "We expect that consumer price inflation more broadly will spike further, weighing on confidence and consumption," she noted, adding that investors would continue to buy gold as a hedge against inflation and currency devaluation.

Boele sees gold prices remain near $2,000 per ounce in 2022 and 2023, up from her previous forecast of $1,500 per ounce.