According to Neils Christensen - Kitco News analyst, investors once again expressed some disappointment with gold as the precious metal closed another week in a weakening state.
After the recent price increase, gold prices are currently stuck in a familiar short-term tug-of-war, as the market tests the support zone of nearly 5,000 USD/ounce in the context that investors have to consider between slowing growth prospects and persistent inflation.
The latest economic data further complicates the picture. US GDP in the fourth quarter only increased by 0.7%, a sharp decrease compared to before, while inflationary pressure remained high.
Neils Christensen believes that this combination raises concerns about stagflation - a weak growth situation accompanied by rising prices, a scenario that policymakers almost have no tools to deal with.
However, for gold, the story is not as simple as the current price movements.
In the short term, the policy stance of the US Federal Reserve (Fed) is still a significant pressure factor. When inflation is still high, the central bank can hardly strongly cut interest rates even though economic growth is slowing down. This means that interest rates are likely to remain high for a long time, thereby supporting the USD and bond yields - two factors that often put pressure on gold prices.
This mechanism partly explains the recent accumulation phase of precious metals. Investors who once expected the Fed to soon ease monetary policy are now forced to readjust expectations, as consumer inflation increases - partly driven by the conflict between the US, Israel and Iran. Interest rates maintained at high levels for a long time increase the opportunity cost of holding gold, because this is an asset that does not yield yields.
However, the factors that are creating pressure in the short term may strengthen the outlook for gold in the long term.
A prolonged period of tight monetary policy or maintaining it at a high level risks exacerbating the already fragile economic environment. Increased borrowing costs are putting increasing pressure on the balance sheets of many governments, as global public debt has reached record levels.
At the same time, geopolitical tensions - from prolonged conflicts in the Middle East to strategic competition between superpowers - continue to increase instability in the global market.
Despite short-term risks, many large institutional investors still view gold from a long-term perspective. Large asset managers believe that gold is a rare diversification tool in the context that both stock and bond markets face increasing structural risks.
In other words, the current weakening of gold may not be due to fundamental factors deteriorating, but mainly the timing issue.
Short-term disappointments may dominate today's headlines. But the momentum forming below shows that the long-term upward trend of gold is still very far from ending.
