The European gas market traded lower in line with other commodities with the drop being supported by no sizable reductions in Russian gas flows and the emergence of spring and weaker heating demand. The spot price reverted lower to trade near €100 per MWh, a 70% collapse from the panic peak on March 7 when the price briefly touched a record €345 per MWh, the equivalent of $630 per barrel of crude oil. In general, the European gas market is in better shape than feared at the start of the year after a mild winter and a flood of US LNG shipments helping boost supplies, thereby avoiding a feared storage depletion. The outlook for next winter, however, remains challenging with the October to winter futures contract trading just below €95 per MWh, a level that points to a continued and prolonged challenge for heavy energy consuming industries.
Gold, just like most other commodities, reversed lower after hitting a panic peak a few dollars below the 2020 record high at $2074. A combination of lower oil prices, the best gauge for geopolitical risks right now and jitters ahead of the FOMC meeting on Wednesday helped trigger a 175-dollar correction until key support was found just below $1900 per ounce. The market then bounced after the FOMC finally began its long-awaited rate hike cycle, and while the stock market rose in response to Fed Chair Powell’s optimistic view on growth, the bullion market received a bid on worries that the Fed will struggle to curb inflation without risking a major slowdown.
Long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, while longer-term focused investors have been continued buyers of gold ETFs since the war began. During this time, total holdings have jumped by 122 tons to a one-year high at 3,236 tons, and it is worth noting that half of the increase occurred during the mentioned correction.
We maintain our bullish outlook in the belief inflation will remain elevated while central banks may struggle to slam the brakes on hard enough amid the risk of an economic slowdown. We believe the Russia-Ukraine crisis will continue to support the prospect for higher precious metal prices, not only due to a potential short-term safe-haven bid which will ebb and flow, but more importantly due to what this tension will mean for inflation which is likely to remain persistently high as global growth slows, thereby eventually forcing central banks, especially the US Federal Reserve, to abandon further rate hikes and instead revert to a period of renewed stimulus.
In such a scenario, we see further upside to gold and especially silver, given our belief in higher industrial metal prices, especially copper. Gold already up 6% in dollar terms and 9.5% in euro terms versus a 7.5% drop in the S&P 500 and the MSCI World index has already, despite headwind from rising real yields, shown its diversification credentials. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential