Pool Of Factors Pushing Gold High

Continued high inflation along with an increase in geopolitical tensions set the stage for gold's climb this year. Gold prices are set to spiral to a new high this year as investors seek haven during an uncertain time worsened by Russia's invasion of Ukraine. Gold is often used by investors and bullion dealers in India as a hedge against inflation.

Safe-haven flows were witnessed to be built up for gold because Ukraine officially rejected the deadline from Russia. Ukraine on Monday rejected Russian calls to surrender the port city of Mariupol, where residents are besieged with little food, water and power and fierce fighting showed little sign of easing. Ukraine's crisis didn’t show any signs of abetment, which resulted in an upwards movement in gold prices.

The war in Ukraine has already caused a terrible human toll. We see it extracting a heavy economic price as well, mostly via higher energy costs. This is a major supply shock layered onto an existing one, and we see it resulting in higher inflation and lower growth, especially in the euro area. This puts central banks in a bind: Trying to contain inflation will be more costly, and they can’t cushion the growth shock.

Investors and bullion dealers in India have also been closely watching the U.S. Federal Reserve, which on Wednesday raised interest rates for the first time since 2018 by 25 basis points. The Fed Chairman Jerome Powell has made it clear that the Fed will cautiously raise rates to avoid triggering a U.S. recession. This cautious stance has only increased in the wake of the Ukraine invasion.

Time and again, we have seen that the prices of gold and gold coins in Mumbai frequently go up simultaneously with interest rate increases. And the same behaviour was witnessed when the Fed raised rates nine times between December 2015 and December 2018, with gold rising 17%, and when the Fed raised rates 17 times between June 2004 and June 2006, with gold going up 57%.

The current inflation figures coupled with geopolitical tensions have resulted in the hoarding of gold. The demand for gold bars and gold coins in Mumbai have risen tremendously from the entire investor community and other financial institutions. The current environment is so uncertain, given the ongoing COVID-19 pandemic, that investors have continued to hoard gold.

Inflows into gold-backed exchange-traded funds (ETFs) are rising globally. According to the World Gold Council, global gold ETFs drew net inflows of 35.3 tons in February. Inflation and interest rates remained critical drivers for gold; hot CPI prints in the U.S. and Europe earlier in the month confirmed that inflation shows little sign of abating. But amidst the rising volatility coupled with geopolitical tensions in Ukraine dominating headlines, the demand for gold outweighed the impact of higher nominal yields and a marginally higher US dollar.

We expect the gains to continue until we reach a settlement regarding the Ukraine issue, which right now seems a long way distant. So, it would not be wrong to say that there is a pool of factors that are collectively pushing gold high - Inflation, pandemic, geopolitical tensions, Inflows into ETF and global demand.

Gold As An Insurance

 While the energy complex has managed to throw off a long list of bearish developments over the past year, markets appear vulnerable to more corrective action, especially oil production from the United Arab Emirates, Iraq, Venezuela, Iran and Saudi Arabia.

Talking about growth, selling in markets for bullion dealers in India such as Gold, Silver, Palladium, and Platinum could lead to turnover spill over the spill. While the dollar is likely to remain weak, the action of the U.S., suspect that the currency will be managed to support straight-forward gold and silver prices. Especially, if oil prices resume the recent decline in action.

Retrospectively, precious metals markets have begun to show sensitivity to classic inflation signals, and therefore, the U.S. CPI release could present a major junction for gold and silver. In other words, a warm US CPI report could result in fears of a rate hike and a resurgence of a stronger dollar and could push prices below $1,950 in April gold and below $25.00 in silver in May, much to the chagrin of the bullion dealers in India. It is a strange prediction that historically warm CPI reading could result in lower precious metal prices!

Let us move on to geopolitical tensions. The war might be coming to an end (keeping a larger hope) as Ukraine surrenders, and now, the aftermath would be soon resurfacing. The financial markets including equities, currencies and commodities made so many rejoicing rallies to catastrophic falls at places.

Other metals have seen their prices surge, with fears of a shortage of physical metals adding to the price hike. The London Metal Exchange saw "unprecedented movements”, and was forced to suspend trading in nickel on Tuesday after prices more than doubled to $100,000 a tonne. But gold stole the limelight, appeasing the gold dealers in India. We all know that gold acts as insurance in times of uncertainty. Thus, it did not only prove its worth as a haven asset, but it also proved to be an instrument to protect one’s wealth during this crisis.

The gradually unfolding events between Russia and Ukraine have compelled markets to sell gold in cash. But we all know that diversification is the key. Even though one is tempted to sell off their positions, they should not, and rather, they should hold on to our best possible. And let us not forget, we are also dealing with a potentially very high inflation rate.

Furthermore, gold had observed a bearish open drive on Thursday, which signalled a carry-forward selling after the risk-on impulse bolstered in the market for the gold dealers in India. The encouraging undertone is a result of a likely ceasefire between Russia and Ukraine. Post the agreement of Ukrainian President Volodymyr Zelenskyy on a diplomatic solution to halt the battering of Ukraine's economy, equities, and risk-sensitive currencies took a sigh of relief.

Gold prices fell sharply from a high near $2,070 on Tuesday. The precious metal has eased almost 6.5% in the last two trading sessions. But we should not forget that the US CPI, which is due next week, holds significant importance as it will dictate the probable monetary policy action from the Federal Reserve (Fed). It will also play a critical role in influencing gold prices along with the consequences of the ongoing war.

It Is A Win-Win For Gold

 US Fed’s Powell was relatively calm and said that he is not very sure how badly this war is going to hurt the US economy, but there is a surety of one thing - rising commodity prices. Hence, he said March 0.25% hike should be appropriate. Now, the Fed’s May and June policy could also see a similar 0.25% rate hike, according to Fed-Fund-Meter.

We all know any rate hike usually weighs down on gold. But strangely, gold has been resilient in January and early February. The reason behind this robustness was the geopolitical stress of the Russia/Ukraine situation, and this may continue to underpin moves higher if the conflict worsens or sanctions don’t have the desired effect, according to the largest bullion dealers in India.

Gold price extended its range play around the $1,930 level for the third consecutive day, reversing a part of Wednesday’s sell-off. Russian bond and currency are getting into junk and become worthless very fast, yesterday late night came with some best stance from Russian Admin, and they are seemingly calm and readying even for a ceasefire. It is quite possible that sooner or later, a puppet president will be appointed in Ukraine. On the other hand, crude is playing havoc as it reached nearly $115. Other oil-importing countries like India and China will be severely affected if crude sustains these high bands, leading the gold and silver will see a good ripple.

Soaring oil prices, a fallout of the Russia-Ukraine crisis, have refuelled stagflation concerns worldwide, reviving gold’s demand as a haven. Meanwhile, the US dollar continues to hold fort amid ongoing strength in the Treasury yields due to the hawkish Fed Chair Jerome Powell’s testimony. Besides looking for a store of value in times of heightened market stress, we believe many investors see the coming rate hiking cycle as extremely risky given the abnormal macroeconomic backdrop.

The next direction in gold price hinges on the outcome of round two of the Russia-Ukraine ‘peace talks’ while the US economic data will continue to play second fiddle. Ring times of market turmoil, investors turn to gold given its perceived haven status, much to the happiness of the largest bullion dealers in India. As Russian troops invaded Ukraine on 24 February, the yellow metal reached $1,974/oz, the highest it has been since September 2020, taking the gold dealers in India by a surprise. However, even before the situation escalated, we were already seeing signs that institutional demand for gold as a portfolio hedging instrument was turning positive.

Demand for gold as a store of value is climbing, as investors confront soaring inflation and the economic uncertainties caused by Russia’s invasion of Ukraine. Gold spot prices have rallied 6.3% year to date to $1,945.30 per ounce on Wednesday. The current uncertainties suggest that institutions are likely to continue to give more consideration to portfolio diversifiers such as gold, as other choices look less appealing, bringing lots of wealth for the gold dealers in India. So, one potential scenario is a spurt towards those all-time highs over the next two weeks before the gravity effect of higher interest rates starts to pull gold prices down again. We think this will continue through 2022 regardless of how the geopolitical situation evolves.