It feels tasteless to give an update on my view on gold in light of the war in Ukraine. But here goes
Earlier in the year, I wrote that the outlook on gold was dependent on three elements. If you think that
- The ongoing bottlenecks in the global supply chain will be fixed, and energy prices will fall back to pre-pandemic levels;
- Policymakers will be able to reduce inflation to pre-pandemic levels; and
- The geopolitical risks (take your pick – US /China trade, Turkey, Russia/Ukraine, Taiwan etc) are not going to get any worse,
then gold will likely do badly in 2022. On the other hand, if you are pessimistic about these 3 factors, then gold will likely do well.
We now know that the geopolitical risks have gotten worse, gold is back hovering around its two-year high of US$1,908 per oz. It is the inevitable investor flight to a safe haven. And this is set against the backdrop of a U.S. dollar that has strengthened over the past twelve months and that has spiked further during last week’s flight-to-safety trade. In ringgit terms, gold has hit a 12-month high of RM8,080 per oz.
For now, the ensuing uncertainty over how this tragic war in Ukraine will unravel is driving the gold price upwards. But as some analysts have argued, safe-haven flows are typically short-lived boosts. That could well be true in this case except for the fact that the West have imposed significant sanctions on Russia and the global economy is experiencing significant inflationary pressures.
I expect that the sanctions will be in place long after the fighting dies down (the only scenario in which sanctions are quickly removed is if there is regime change in Russia). I expect Russia to react to the economic and financial sanctions with their own countermeasures. I expect all these will further fuel inflationary pressures in Europe specifically and around the world generally. Policymakers and central bankers will be under more pressure to increase interest rates to combat inflation. In the case of the US, higher interest rates in a world of heightened geopolitical tension will likely lead to a stronger dollar. A stronger dollar is likely to weaken the purchasing power of other currencies including the ringgit more than it will weaken gold.
The chances of a prolonged gold run has increased significantly.
