Gold most expensive in 8 months. In the background, inflation and geopolitical tensions

Gold returns to favor investors. The demand for the ore is built by: record inflation and the threat of an armed attack by Russia on Ukraine. Gold prices rose to an 8-month high on Tuesday above $ 1870 an ounce. The reason for this may be the growing tension between Russia and the West over Ukraine. This, in turn, could induce investors to enter into assets considered safe, such as gold.

Arguments of the threat of war and rising inflation

Yesterday, the US Secretary of State Antony blinken ordered the closure of the US embassy in Kiev and urged the Americans to leave Ukraine, citing the rapid build-up of Russian troops near the border. The precious metal is usually viewed as protecting capital against the influence of geopolitical conflicts.

The threat of a Russian invasion and the resulting supply disruptions also caused an increase in oil prices, which fueled fears about inflation and could additionally affect gold price increases. Last week, the data showed that inflation in the US in January was 7,5%, the highest level in 40 years.

Ore instead of the cash phase of the cycle

Since the beginning of the year, gold has increased by 2,3%, despite the profitability at that time American 10-year bond broke 2% and the market started to price in at least 5 interest rate hikes in the US, including the possibility of a 50bp rate hike in March. This may indicate a potential resistance of gold prices against rising interest rates in the US and direct investors towards the gold as a hedge against inflation and possibly a larger correction in the stock indices.

The American economy could also reach its peak of the business cycle, i.e. the maximum rate of GDP growth, and the maximum rate of inflation may soon appear. In theory, this could mean the cash phase of the cycle. Due to the fact that inflation has recently broken records, cash in the form of paper currencies is not profitable to hold, so investors may also choose for gold.