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. The bullion king of India said once, “Gold is often used by investors 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, according to the bullion king of India – Prithviraj Kothari.
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 had 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 gold prices 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 coins 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, says the bullion king of India – Prithviraj Kothari.
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.