With the Russian invasion of Ukraine left behind for a week, heightened geopolitical uncertainty has ignited a fire in the gold market and prices continue to hover well above $1,900. In times of uncertainty, it’s not surprising that people seek safety wherever they can find it. According to experts, this is currently the US dollar and gold.
Inflation risks increase along with geopolitical risks
cryptocoin.com As we have covered in the news, since the invasion of Russia, approximately one million Ukrainian refugees have fled to Europe, creating a major humanitarian crisis. The war also creates great global economic uncertainty. The Russian economy was almost completely crippled as businesses cut ties with the aggressor country.
Not surprisingly, the war has had a huge impact on oil prices. Supply cuts have pushed prices back to over $100 a barrel, the highest level since 2008. Rising energy prices increase inflationary pressures. This environment continues to create great volatility in the stock markets, which are in the correction zone.
With fewer and fewer alternatives available, investors are collectively turning to gold and precious metals. Prices ended the week with an impressive 4% gain. Many analysts continue to say that it is only a matter of time before prices rise above $2,000.
Gold’s rally on Friday is even more impressive given the economic background. On Friday, data from the US Department of Labor said the US economy created 678,000 jobs in February. At the same time, the latest nonfarm payrolls report showed the unemployment rate fell to 3.9%.
Gold continues to attract safe-haven flows
Earlier in the week, Federal Reserve Chairman Jerome Powell said the central bank has decided to raise interest rates later this month, despite the uncertainty caused by the conflict in Eastern Europe. However, he added that the Federal Reserve still needs to be agile when evaluating incoming data.
According to market analyst Neils Christensen, at the beginning of the year, news of an impending rate hike would have been enough to rouse the gold bulls; but these are valid for normal times, in this environment the need for a safe haven provides a strong motivation.
In a recent commentary, Schroders fund manager James Luke says gold is on its way to the only real safe-haven asset for investors, as inflation weighs on traditional bond markets.
“We are at the forefront of the gold trade and we are seeing more investors turn to gold and add it to their portfolios at higher rates,” said Peter Grosskopf, CEO of Sprott Inc., makes the same observation as James Luke. Sprott CEO comments:
This is the basic theme for gold. People are starting to realize that if they don’t do something, they can’t be protected. The pressures have increased, so being in bonds will hurt you. Feeling hurts you. Holding cash punishes you, but it’s prudent to hold cash right now.
“Many investors view the rate hike cycle as extremely risky”
Schroders’ fund manager, James Luke, says that in addition to Russia’s war in Ukraine, which created a major humanitarian crisis that affected millions of people, changing monetary policies around the world pose another major threat to the global economy. The fund manager explains:
In addition to seeking a store of value during times of increased market stress, we believe many investors view the upcoming cycle of rate hikes as extremely risky given the abnormal macroeconomic backdrop. Developed economies, in addition to being highly indebted, have become dependent on massive monetary and fiscal incentives. As incentives disappear and interest rates rise, the potential for negative effects on the real economy and financial markets increases.
“Gold will be a safe haven asset without alternatives in the coming years”
James Luke says that there is a risk of creating an environment of stagflation, low growth and high inflation when central banks tighten their monetary policies. If that happens, he says, central banks will quickly reverse course, meaning real interest rates will remain in negative territory.
The fund manager states that gold is on track to become a “TINA” (no alternative) safe-haven asset in the coming years. In particular, James Luke explains that bonds, a traditional hedge against market volatility and a balance against portfolio risk, are not very attractive in the current environment:
With economies highly indebted, interest rates still near historic lows, and inflation structurally higher, it’s hard to argue that traditional hedges like government bonds are as attractive as they were in the past.
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