(Kitco News) The gold market has woken up after a disappointing year. And while geopolitics was the initial trigger behind the price spike, analysts say it’s about much more than that. Here’s everything you need to know.
The precious metal has already gained 9.4% since the beginning of the year. Very strong gold returns, especially after closing 2021 with a 3.6% drop, the worst performance since 2015.
Geopolitical uncertainty regarding Ukraine and new sanctions against Russia have created strong demand for gold. Investors view the precious metal as a hedge against risks, inflation and economic shocks.
“The price of gold is currently skyrocketing mainly due to geopolitical circumstances. With increased economic volatility caused by the war in Ukraine and Russia, investors are nervous and are turning away from stocks that are declining, instead putting their money into the traditional safe haven of gold,” said MarketOrders co-founder and COO Suhi Yutla. .
Why gold?
The move up in gold began weeks before Russia invaded Ukraine. One of the main triggers was a new outlook on inflation, when markets began to question the ability of central banks to control rapidly accelerating inflation in light of severe supply chain problems.
However, as relations between Russia and Ukraine worsened, the rally really gained momentum. The precious metal topped $1,800 and $1,900 in February, hitting a new all-time high of $2,078.80 an ounce on March 8.
Since the start of the war in Ukraine, gold ETFs alone have received 55 tons of inflows, according to Commerzbank analyst Daniel Briesemann. “Gold is in significant demand as a safe haven, as evidenced by the sustained high inflows to ETFs. According to Bloomberg, yesterday the inflow was more than 14 tons; the inflow since the Russian invasion of Ukraine amounted to 55 tons.
However, even this $200 price move has many analysts reminding investors that geopolitical triggers are temporary drivers for gold and much of the gains are likely to be lost eventually. And then the war in Ukraine and tough sanctions against Russia began to weigh on global inflation and the economic outlook, raising fears of stagflation.
“We are sliding into full-blown sanctions,” Bart Melek, head of global strategy at TD Securities, told Kitco News. “Usually, the risk premium to gold after geopolitical events quickly disappears. But in this situation, even if things calm down, you will still have an inflation problem. And it doesn’t look like she’s going to calm down anytime soon. hope for peace, but from what we’ve seen lately, that’s unlikely.
Even Federal Reserve Chairman Jerome Powell admitted he is keeping a close eye on the “unintended consequences” of the conflict.
Higher commodity prices have been the main problem, Powell said. He added that the most important thing to watch was how sustainable these commodity price hikes would be, saying that any long-term oil shock could cause inflation and slow economic growth.
This is where analysts began to describe that gold is starting to shine again due to this mixture of geopolitics and stagflation fears.
Let’s talk about safe havens
The war in Ukraine has reminded investors around the world how tangible gold is, which has made it so attractive for millennia.
“The world is returning to the idea that gold is physical, hold it in your hands, gold is the money you need in a crisis. More than ten years of peace and bullish stock markets have helped us forget this truth. But the Russian invasion of Ukraine has brought the reality of life back into the crisis in real time,” said Mangrove Investor founder and CEO Matt Badiali.
This crisis is causing investors to ask questions like how useful digital money is when there is no internet, how to access bank accounts if funds have been frozen, and how people can afford anything if their currency is rapidly depreciating, Badiali told Kitco News. .
“The solution to these problems is gold (and other precious metals). In conditions of peace and prosperity, the need for cash disappears. We can appreciate things like digital photos. But when you are hungry, cut off the electricity. and the internet, those things don’t matter. If I can’t access the internet, I can’t sell you food prices. But I can trade you a necklace or a ring for a loaf of bread,” he said. .
And on top of that, investors never forget the path of the Federal Reserve, which was on its way to start aggressively raising rates prior to Russia’s invasion of Ukraine.
“Inflation expectations have risen everywhere. The Fed will be in a difficult political situation,” Melek said. “If they become aggressive, will it really help inflation? Not really. There is a shock offer. The inflationary impact from higher rates will come later. therefore, gold is rising.”
What’s next for gold?
This rally has cemented a new level in gold prices, Badiali said, adding that he does not expect the precious metal to fall below $1,600 an ounce in the next five to 10 years. “My working hypothesis is that these lessons will lead to a higher gold price base going forward,” he said.
Gold is likely to continue rising for most of this year, Yutla notes. “I predict gold could go up to $2,500,” she said.
In addition, with Russian sanctions putting significant upward pressure on many commodities, gold looks to be one of the main beneficiaries this year, said Mike McGlone, senior commodities strategist at Bloomberg Intelligence.
“Gold should be the main beneficiary of the Russian-Ukrainian war and commodity price spikes that hurt demand. We view metal as a leading potential end-game performer in 2022, especially as commodities priced under supply shocks succumb to inevitable demand disruption,” McGlone said in a note this week.
Some analysts do not even rule out that in this bullish cycle, the price of gold will approach $3,000 an ounce. That’s because if gold’s all-time high in the 1980s is adjusted for inflation, it would be $2,927 an ounce, Melek said. “In nominal terms, it was about $850 in 1980,” he said. “When I adjust for inflation, it comes out to $2,927. This is a record high figure, if inflation is taken into account.”
Another support factor in the future will be additional gold purchases by the central bank. Gold is seen as a real asset that no one can take away, Melek said.
“I suspect that central banks are doing a lot of buying. It turns out that Russia’s $600 billion in gold and foreign exchange reserves are useless because its central bank has been sanctioned. The only thing that seems viable right now is physical gold. on an individual level, as your accounts may be frozen. If your internet is turned off, you will not be able to get your money. But no one can access the physical materials,” he explained.
Gold is still at the start of its latest bull cycle, which began in 2020 and is likely to continue for another eight or nine years, said Canadian investor Stan Bharti, who founded the merchant bank Forbes & Manhattan. “Gold will go up a lot more expensive at $4,000-$5,000 this cycle,” Bharti said, referring to the current inflationary cycle.
He added that in the shorter term, gold should hit $2,500 by the same time next year. “Inflation is back on a grand scale. Whenever inflation returns, currencies fall, with all the geopolitical uncertainty, mining these metals will be more difficult,” Bharti said.
Denial of responsibility: The views expressed in this article are those of the author and may not be those of the author. Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a call for the exchange of goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article are not liable for any loss and/or damage resulting from the use of this publication.