Gold hits $2,000 as Russia–Ukraine war drives demand

Gold, nicknamed the yellow metal, has hit the $2,000 an ounce trading zone, the highest since August 2020, as investors run towards what they perceive as safe-haven assets amidst geo-political tension caused by the Russian-Ukraine war.

Last week, the benchmark gold futures rose 4.2% for its largest weekly advance since July 2020. Since August 2020’s high, gold has retraced to as low as $1,600 levels. However, due to a hawkish federal reserve, global inflationary pressures and now an ongoing war, it has pushed the asset class which many believe to be a safe haven asset to trade above the $2,000 resistance zone.

Gold’s standing as an inflation hedge has also been greatly boosted by the growth in U.S. prices due to ultralow interest rates and trillions of dollars of pandemic-related spending. The Fed slashed U.S. interest rates to nearly zero after the Covid-19 outbreak in March 2020 and kept them there to enable economic recovery.

What you should know

• Almost two weeks ago, Russia began a special military operation into Ukraine, which sparked the beginning of an all-out war between the two nations. In an attempt to support the Ukrainian government and its people, the United States and other European nations, began imposing sanctions on Russia.
• Asides from sanctions by governmental organizations, private entities and solidarity with Ukraine have began to stop operations and dealings within the country. PayPal, MasterCard, Visa, KPMG, and many others have stopped all services and businesses between and within Russia.
• Due to Russia being an economic powerhouse, there are severe economical consequences for not dealing with the nation. For example, Russia is the second largest producer of oil and because of oil traders deciding to stop trades with the nation also in solidarity with Ukraine, there is a worry that the global energy market will be tightened. Today alone, the Brent oil future surged past $135 per barrel, the highest in 14 years.
• Aside’s oil, we have wheat, which Russia accounts for over 20% of the global export and Palladium which Russia produces over 40% of the world’s global supply. Because of Russia’s economic significance and diverse export portfolio, many are predicting that higher inflation rate is to be expected in the nearest future.
• Due to the expectation of high-interest rates, investors are beginning to take shelter to what they believe to be a safe haven asset. Gold is known to be the first asset class of thought when it comes to what investors perceive as a safe haven asset because its market capitalization of $12.544 trillion is presumably too big to fail and has historically maintained its value overtime. Hence, investors run to it in times of inflationary pressure and geo-political crisis.

Higher Gold prices is expected in the future as long as the war continues to playout and inflation rate persists. The Personal Consumption Expenditure Index, a U.S. inflation indicator closely followed by the Fed, rose by 5.8% in the year to December and 6.1% in the 12 months to January, Both readings also indicated the fastest growth since 1982.

Holdings in gold-backed ETFs could increase by 600 tons this year if concerns over U.S. growth widen, potentially leading to a price spike to $2,350 an ounce, according to Goldman Sachs. Inflows into funds have totaled just above 100 tons so far, Bloomberg data showed.