This update was written Thursday before Russia’s overnight attack on Ukraine help drive another upside extension in gold and silver. The text has been left unchanged while the charts and comments at the bottom has been updated. The rally was supported by a drop in US bond yields as investors took shelter from the carnage unfolding in the stock market. Gold priced in euros meanwhile trades near the 2020 high with safe-haven demand more than offsetting the negative impact of a stronger dollar. Gold and silver are likely to remain in demand with bonds struggling to provide the usual safe haven as this conflict comes with even higher inflation as a product. In addition, central banks must balance rate hikes against an accelerated economic slowdown, and any lowering of the current 7 rate hike expectations will further support the metals.
In other words, the Russia Ukraine crisis has turbocharged our belief in higher precious metal prices, not only due to a potential short term safe haven bid, but more importantly due to what this tension will mean for inflation (UP), growth (Down) and central banks rate hike expectations (Fewer).
Gold’s three-week uninterrupted rally has paused after reaching key resistance and following a slight lowering of the geopolitical temperature. In addition, a 130-dollar rally from the January low and a significant outperformance relative to other asset classes, has also created the need for consolidation while pondering the next move.
Prior to the latest run up in prices that was driven by geopolitical tensions over Ukraine and momentum buying from traders focusing on technical breakouts, gold had for several weeks managed to defy gravity amid rising US real yields. Several attempts below $1800 quickly found buyers with physical demand from Asian buyers and central banks providing a bid strong enough to quell selling attempts by traders and algorithmic trading systems focusing on surging real yields.
Gold traders have instead increasingly been focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations as well as increased turbulence in the bond market. Even more aggressive rate hikes may end up being positive for gold as it will further raise the risk of a policy mistake from the Federal Reserve.