Rally for ‘wrong’ reasons? Gold price eyes high levels as Russia-Ukraine tensions get mixed with Fed policy mistake calls

(Kitco News) Gold has benefited from its safe-haven appeal as markets assess the Russia-Ukraine risk. And according to MKS PAMP, this geopolitical conflict could have even a more significant impact because of the current macro environment that has investors pricing in a policy mistake by the Federal Reserve.

“The US has the highest inflation since 1982, coinciding with a Fed that is still technically easing (the market incorrectly assumes tapering is tightening, but the Fed is simply adding less liquidity),” said MKS PAMP’s head of metals strategy Nicky Shiels.

With inflation running at new four-decade highs in the US, markets are worried that the Federal Reserve has already made another policy mistake by acting too late.

“Markets are shifting from pricing in a past recent Fed mistake (incorrectly reading inflation & calling it transitory) to a potentially new Fed mistake (early recession on aggressive rate hikes or untamable inflation),” Shiels noted.

And considering the flare-up between Russia and Ukraine, the geopolitical situation is looking extra favorable for gold. This is despite geopolitical fears usually being temporary drivers for the precious metal.

“We’ve always noted that geopolitics provides better opportunities to fade gold prices, vs. chasing the buying, but when these headlines occur at a time of 1) such uncertainty around the Fed & inflation, 2) general market angst, and 3) at an advertised technical inflection point, gold could capitalize and find higher ranges for the ‘wrong’ reasons. Higher floors, dip-buying & choppy markets persist,” Shiels explained.

Gold and the Crimea 2014 flare-up vs. now

MKS PAMP also compared gold’s reaction to Russia’s annexation of Crimea in 2014 to how it behaved this time around.

Gold is a war hedge and compared to the climb back in 2014, there is potential for an even more significant move higher following gains of around $80 on this Russia-Ukraine conflict, MKS noted.

“Gold’s recent run-up has been $80 vs. $140 then (during Crimea’s annexation in 2014), on 2.3mn oz of inflows (vs. 8.3mn oz, then). IE: the ‘price escalation premium’ of $80 is, so far, 4/7th of what it was in 2014, with inflows much more meager, at only 1/4th the size seen back then,” Shiels calculated. “Overall, it’s still too early for bulls to get the poms poms out; prices are constructive with this recent breakup/out (3rd time), but on a historical basis, gold prices are lagging what they can potentially achieve.”

However, a large part of the move higher in gold during the past week was also due to the growing inflation risk, with more investors opting for the safe-haven metal to protect against rising price costs. This adds strength to the geopolitically triggered move higher in the precious metal.

“Gold is likely to put in a fight (vs. de-escalation headlines) given relatively lighter positioning, strong physical demand (or other ‘protection’ currently keeping dips below $1,850 short-lived),” Shiels added.

At the time of writing, April Comex gold futures were trading at $1,870.60, up 0.78% on the day.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/or damages arising from the use of this publication.


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