Good old gold offers refuge amid Ukraine crisis

Gold prices closed February with a 6.2% gain for the month. This is much higher compared to the performance of various safe-haven assets last month:

  • DXY (US dollar benchmark): 0.17%
  • Swiss franc against US dollar: 1.12%
  • Japanese yen against US dollar: 0.1%
  • US Treasuries (Bloomberg US Treasury Index): -0.66%

Why has the price of gold increased?

Gold bulls (those who believe gold should climb higher) have fed off the Ukraine crisis to make bullion the outperforming safe-haven asset amid Europe’s worst security crisis since WWII .

Indeed, the crisis in Ukraine is an ever-changing situation, with investors and traders having to digest a deluge of headlines and adjust their market activities accordingly.

  • Since the weekend, some Russian banks have been excluded from the SWIFT messaging system. The US government also rolled out new financial sanctions on Monday, including banning US citizens and businesses from doing business with Russia’s central bank and its wealth fund.
  • Meanwhile, Russia has banned airlines from 36 countries from using its airspace, while rolling out various measures to support its currency, the rouble.

Overall, as Russia and the West try to advance their respective causes, markets are very concerned that this will have a major negative impact on the global economy.

Here is one such story:

  1. These sanctions could ultimately harm Russia’s ability to export crude oilnatural gas and other important products such as wheat, nickel and aluminum.
  2. When these much-needed commodities become harder to find, at a time when the world needs them more as the global economy continues to reopen, it could drive up the prices of these commodities.
  3. Commodities are a major driver of inflation. Consider how high fuel prices make it more expensive to transport farm-fresh vegetables to grocery stores. And since the grocer wants to protect his profit margins and keep the business running, he must then increase the prices he charges customers.
  4. Ultimately, if inflation is too high, households might decide to cut back on spending because things are just getting unaffordable.
  5. When spending drops dramatically, the economy can grow at a slower rate, or worse, even fall into a recession.
  6. There could be a greater risk of recession if central banks, in their quest to control inflation, get it wrong and raise interest rates too quickly (meaning people and households have to spend more money). money to repay their loans instead of buying more goods and services that can help support the economy).
  7. If the markets sense that a recession is becoming more likely, investors and traders may want to preserve their money, selling “riskier” assets such as stocks and putting the money in safe havens.

And after?

Markets are looking for more signs that the above narrative could come true.

Such a scenario should encourage more investors and traders to turn to gold, which has proven to be a worthy safe haven for a very long time, even before the ongoing Ukrainian crisis.

More headlines this week that show the Ukraine crisis deteriorating further and compounding the negative impact on the global economy, could see prices retest last week’s highs.

Technical analysis: Gold prices on track for higher highs?

Looking at the charts, the declines in gold prices appear to have coincided with markets trying to catch their breath and dispel their worst fears.

From a technical perspective, spot prices appear to have pulled back from overbought conditions, with its 14-day Relative Strength Index moving away from the 70 level, which generally denotes overbought conditions.

Such a technical move could help gold establish a stronger base from which to launch higher.

Gold then needs to stay above the June 2021 high at $1916.39 for an extended period to convince markets that it can climb to the November 2020 and January 2021 highs at $1965.30 and 1959. $.21 respectively.

Gold daily chart

Gold has shown recently that it tends to surge first and ask questions later.

These episodes of volatility may present many opportunities, especially for gold bulls, depending on the evolution of the Ukraine crisis, which looks far from over.

By Hantan Chief Market Analyst at Exinity Group

Warning: The content of this article includes personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer and/or solicitation for any transaction in financial instruments and/or a guarantee and /or a prediction of future performance. . ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not warrant the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

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