February 2022, the month leading up to the crisis in the Ukraine, saw inflation in the USA leap onto new ground. On the wings of the battle in Eastern Europe, commodity prices shot up, exacerbating the inflation challenges consumers have been facing for some time. In fact, the annual increase in inflation at the time was the biggest in 40 years.
The arrival of the pandemic in March 2020 started the upward trend in inflation, when trillions of dollars of government aid were pumped into the economy and consumers changed from spending money on services to spending it on goods.
Although gasoline prices pulled back by 0.8% in January 2022, they rebounded with a vengeance next month, climbing up 6.6%. US President Joe Biden then put a stop to Russian oil imports to the US in early March. Food prices went up by a considerable 1% in February, keeping the pressure on families trying to make ends meet. Rent in the US rose by 0.6% in February alone. The US Federal Reserve was expected to raise interest rates in mid-March and must have felt “Pressure… to do something, anything, to slow down the speed at which prices everywhere are moving higher”, said Chris Zaccarelli of Independent Advisor Alliance. Gold trading, like the trading of other commodities, was directly affected by the onset of the Russian invasion, causing considerable concern for online traders. Let’s take a closer look at how gold trading prices have responded to the conflict in Ukraine so far and what we could expect next.
Going into the Conflict
The day before the invasion, as tensions were boiling over in Ukraine, gold bullion was already worth more than it had been since June 2021. On that day, spot gold rose by 0.5% to $1,907.07, despite the fact that the new month was expected to bring tighter monetary policy from the Fed. When the Fed raises interest rates, this often tends to push gold prices down, since gold doesn’t bear interest. Traders are drawn to gold both in times of stock market slumps, when they want to make sure their money won’t be drained away with falling stocks, and in times of inflation, when they want to ensure their money retains its value, thus earning its safe-haven status.
When the fighting began, traders predictably grew concerned about a global economic downturn and sent their money in the direction of gold. As a result, by March 10th, gold trading prices had almost reached $2,000 an ounce. “The inflation numbers are certainly an underlying bullish element for gold. However, geopolitics is trumping economic data right now”, explained Jim Wycoff of Kitco Metals. Three days later, gold had topped $2,000, completing a huge 10% increase in price since the beginning of January, as traders’ concerns about inflation and the global economy persisted. Consumer interest in physical bullion was robust in 2021, amounting to 1,124 tons, but now it took off even more. One bullion dealer reported a 235% rise in sales in the first week of the battle.
Geopolitics Versus Interest Rates
On March 14th, amidst Russia-Ukraine peace talks, gold trading prices fell back 2%. “There are some potentially positive developments on the Russia-Ukraine war front and that has rallied equities markets and dented the metals market”, explained Wycoff. Also, some analysts felt that gold’s safe haven appeal would be balanced out by soon-to-rise interest rates. “On average, gold prices tend to firm in the immediate aftermath of a risk event and surrender these gains within a month”, said Suki Cooper of Standard Chartered Bank.
At the same time, analysts like Aakash Doshi of Citigroup commented that when geopolitical events make permanent dents in the economy, as in the case of the oil embargo of the 1970’s, gold prices can be elevated on a long-term timeline. Doshi suggested that if the Ukraine conflict interferes with supply chains and pushes up inflation on an ongoing basis, “Gold prices are likely to be more supported with higher risk premiums and more dovish central bank reaction”. Another thing that could keep bullion prices high is steady inflow into gold ETFs in wartime.
Peering Through the Smoke
Citigroup suggests that gold trading prices might find themselves at $2,100 this year, but concedes that, if the conflict cools down, they could settle back to $1,800. We saw on March 14th how sensitive gold prices were to any indication of de-escalation in the battle. Still, Julius Baer of Carsten Menke says “I wouldn’t call [the recent rally] the peak in gold just yet, because this [Ukraine] situation is still uncertain. It’s so fluid”, thus indicating a period of volatility could follow. Those with an eye on the CFD markets ought to follow the news closely, both global and financial, to stay abreast of key moments in the Russia/Ukraine war that may affect gold trading prices.