How The Russia-Ukraine War Is Making Gold Shine

The volatility spawned by the Russia-Ukraine conflict is more than keeping the price of gold afloat in the international market. So far in 2022, the price of the precious metal has jumped by 6.54%.

“Not As Bad”

This year, the price of gold reached a maximum of $2,074 an ounce on March 8, given the uncertainty generated by Russia's invasion of Ukraine. Since then, the metal has fallen by 4.56%.

However, it still remains 6.54% above its December 2021 closing price of $1,833.40 —down to its current level of $1,953.35 per ounce.

According to experts, the main factor pushing the price of gold is the war between Russia and Ukraine. The fear will remain latent as long as there is no peace agreement, but without the war and the Federal Reserve raising rates, gold could have lost more value.

Russian Appetite

Another trend is the purchase of gold by Russian investors since they have restrictions to purchase dollars as part of the U.S. sanctions. Investors in the war-waging country are seeking to acquire gold as part of a reserve of value in the current scenario.

Amin Vera, Director of Economic Analysis at Black Wallstreet Capital, said that “gold is one of the few assets that move in the same direction as inflation, but at a slower speed, in addition to moving in the same direction as the other raw materials.”

According to the World Gold Council, at the end of the 2021Q4, the demand for gold was 1,146.8 tons, 24.1% more than the previous quarter, when it was only 924 tons or 49.3%, compared to the total demand in late 2020 of 768.2 tons.

The largest proportion of gold demand is in jewelry, with 62.2% of the total by the end of 2021, up from 485.2 to 713 tons in one year. Investments in gold-backed ETFs also represented 26.2% of the total demand in 2021Q4, going from 138 to 300.2 tons in 12 months.

Other Key Factors

Amin Vera said the economic reopening benefited the demand for gold in 2021. The jewelry sector reached a boom due to the increase in weddings in major economies such as India. This is so “because it is an important tradition in that country to give gold as a gift to adorn clothes and festivities with that metal”.

The downward pressure on gold prices on Thursday occurred along with an increase in the yields of Treasury bonds and the consolidation of the dollar given the expectation that interest rates in the U.S. will increase more rapidly.

Jerome Powell, chairman of the Federal Reserve, said a 50 basis point increase in the benchmark interest rate is on the table for the May monetary policy decision.

“The truth is that, since gold does not earn interest, investors switch to other more attractive assets such as U.S. Treasury bonds. This adds to the effect that, in a high inflation rates scenario, the central banks increase their reference rates and, consequently, people leave assets that do not generate interest,” Vera pointed out.

He added that “in real terms, in order not to lose purchasing power with gold, the metal should be rising above the inflation rate —which in the U.S. is 8.5%— and exceed $2,070.”

Vera agreed that the increase in interest rates by central banks and especially by the Fed does generate a contraction in the price of gold. However, in a scenario of high volatility such as the current one, with the conflict between Russia and Ukraine, the price of gold will continue to rise.