Influence on Gold

INFLUENCE ON GOLD:
Geopolitical events can give gold price a short-term boost but the effect can quickly wear off. Gold can benefit while geopolitical tensions are high and then it’s seen as a safe haven. As tensions built between Russia, US and EU over Ukraine, the gold price has moved $100/oz and jumped last Thursday as the situation escalated giving back those gains on Friday.

The uncertainty over the duration of the crisis could keep the gold price supported for a while, however, once the Ukraine situation stabilizes, the gold price could fall further. Real interest rates are deeply negative, and are likely to stay negative even with the Fed raising rates. High energy prices have led to high inflation and the year-on-year gains may become smaller as 2022 progresses. However, core inflation, which excludes food and energy, is also high at 6.0% in the US in January showing that the inflation drivers are broader than just commodity prices

The price of gold looks undervalued compared to how low real interest rates are, and this could support a higher gold price even without the safe-haven boost from geopolitical tensions. The expected rise of interest rates by the Federal Reserve at the meeting in March is estimated 67% for a 25bp and 33% for a 50bp and this move towards a less accommodative monetary policy caused the inflation take off with inflation reaching 7.5% in US in January but for gold a monetary tightening could be an advantage. Rising interest rates always means rising gold prices except in 1983 when the price fell by over 11% and 1994 when the gold price fell by 3%.

Investors and speculators have returned to gold. Speculators’ net position of gold futures has risen by 18.6% to 23.9 moz since the beginning of and daily average trading volume for gold ETFs was up 49% for January. The largest market for gold ETF trading is North America, where US-based funds have 56.6 moz of ETF-held gold. Germany is in second place with gold ETFs that boast combined holdings of just over 10.5 moz. German and US ETF holdings have risen by 325 koz and 1.9 moz, respectively, since the start of the year.

India and the UAE have agreed to cut tariffs on gold trade across the Arabian Sea. According to the terms of the agreement, Indian jewelry exports to the UAE will have zero duty access into the trading hub, where currently the UAE charges 5%. Importantly, gold exportation from the UAE to India will see a 1% tariff advantage over imports from the rest of the world, up to 200 tons. This move is unlikely to increase Indian demand for the metal but should encourage Indian buyers to preferentially import from the UAE. India is the second-largest gold jewelry market, with demand of 611 tons last year.

Safe-haven gold is showing its mettle. Financial markets have reacted violently to the Russian actions in Ukraine with equities selling off, the dollar strengthening, and the gold price rising. The oil price jumped higher despite a US State Department official saying that any sanctions against Russia will not include oil or gas. In euros, the gold price reached a new record of €1,768/oz, but gold’s gains on Thursday were more than reversed on Friday.

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