Gold surges on Russia-Ukraine crisis

While endeavoring to plot the possible future price movement of gold, it is easy to get enamored by the news flow and rhetoric that a large geopolitical event like the Russia-Ukraine crisis generates.

There is no doubt that the upward trajectory taken by the precious metal was largely accentuated due to the crisis, but the interest in gold was owing to multiple factors, preceding the Ukraine crisis. Let’s explore how these factors pan out shortly and the effect they possibly could have on gold.

For starters, the ongoing conflict in Ukraine is providing a lot of support to gold, which has always been the safe-haven choice for many. This has catapulted the prices by as much as $144 in the last 30 days. Gold prices would have ideally rallied a lot more, but we have seen some of the safe-haven investments divert towards USD, pushing the dollar index towards the $98.60 mark.

Gold could see higher inflationary trend

That said, the yellow metal’s surge on the back of a geopolitical flashpoint like Russia’s invasion of Ukraine may be short-lived if history is anything to go by. We did see gold rallying by as much as 3.4% when Russia launched its attack on Ukraine, but prices have consolidated since then, even as other commodities continue to rally. Thus, just the Ukraine issue doesn’t warrant higher gold prices.

As a result of this war, we could see long-lasting macroeconomic impacts. Higher commodity inflation, arising from the imposed sanctions, supply bottlenecks, and depleting supplies, will further accentuate the global inflationary trend. A high inflation scenario essays well for gold.

We could witness the onset of stagflation, where there is high inflation and slowing growth. The central banks will most likely adopt a more dovish stance to counter the same, which is counterproductive for managing inflation. The central bankers are stuck between the devil and the deep blue sea.

Even in the recently held FED meeting, FED Chair Jerome Powell reiterated his support for a 0.25% rate hike, lower than the earlier proposed 0.50% rate-lift in the March meeting. He also mentioned that they will remain accommodative and watch how the Ukraine situation impacts the economy, a clear move towards being dovish.

Any aggressive rate hike will hurt gold, but the likelihood of the same looks bleak. Also, historically, in every period where there have been rate hikes, initially there is a correction in gold prices, but after the actual event, the commodity has generally rallied.

Given this setup, every dip could be taken as an opportunity to buy. Investors and traders will get opportunities to enter on dips, as the volatility is extremely high. One could look at playing the volatility. There is a high probability that gold could breach the $2000 levels in the coming weeks. Given the volatility, strict stop loss must be exercised.