Russia-Ukraine conflict, inflation likely to keep gold higher this year

Gold prices are likely to rule at elevated levels in 2002 in view of the geopolitical risks created by the Russia-Ukraine conflict besides factors such as inflation, chances of global growth being affected and fears of new Covid-19 variants emerging, analysts say.

Last week, US investment bank Goldman Sachs raised its gold target for this year to $2,500 an ounce citing increased central banks’ demand along with economic, geopolitical uncertainty and resilient Asian retail demand.

Price forecast 

US research agency Fitch Solutions Country Risk and Industry Research (FSCRIR), a Fitch unit, has raised its gold price forecast for 2022 and 2023 to $1,900 from $1,700 and $1,800 from $1,650, respectively. 

The research agency said the forecast has been raised “on the back of the Russian invasion of Ukraine that has sparked an uptick in the demand for the safe-haven asset as investors adopt a risk-off sentiment”. 

ING Think, a financial and economic analysis wing of Dutch multinational financial services firm ING, pointed out that speculators are building long positions in the yellow metal, an indicator of the bullish outlook.

On Monday, gold was quoted at $1,925.75 an ounce, up a tad over Friday’s close. The yellow metal hit a high of $2,075 on March 8 before dropping below $1,900 and then recovering to current levels. 

Domestic prices for pure gold were quoted at ₹51,340 per 10 gram, while ornament gold ruled at ₹50,110 in Mumbai. 

Capping factors

Investment in gold seems to be a better option this year despite less than 0.5 per cent returns this year compared to negative returns in the equities market. 

Fitch Solution said it sees a strong resistance at the record high of $2,075, while there is new support at the $1,820-mark.

“Gold prices will be dictated largely by the war in the coming months, we expect US dollar strength and recovering bond yields to cap gold’s rally. On the one hand, gold is being supported by the Russia-Ukraine war, rising global inflation, and the still persisting Covid-19 pandemic,” FSCRIR  said. 

ING Think said speculators continued to boost their long positions as market participants continued to assess the impact of the ongoing Russia-Ukraine conflict on global markets. 

Net longs in COMEX gold was 147,501 lots last week, down from the previous week as short positions increased to over 38,000. It was also one of the weeks when gold had its worst seek in the last eight months. 

The World Gold Council, a body of gold producers, in its outlook for 2022 said the yellow metal will face “two key headwinds” of higher interest rates and a strong dollar.  

Robust demand

However, the impact of these might be offset by support factors including high, persistent inflation, market volatility linked to COVID, geopolitics etc., and robust demand from other sectors such as central banks and jewellery.

Goldman Sachs said gold’s uptick will come from rising investor demand for inflation-hedged assets and Asian consumption.

But FSCRIR said the US Federal Reserve’s normalisation of monetary policy, recovering bond yields, strengthening dollar, and continued easing of Covid-19 restrictions as vaccination rates continue to rise will put a lid on gold prices. 

Still, it expects prices to rule higher than pre-Covid levels as the Russia-Ukraine conflict is evolving. 

Risk hedge

The WGC said gold’s performance during 2022 will ultimately be determined by factors that tip the scale. “Yet, gold’s relevance as a risk hedge will be particularly relevant for investors this year,” it said.

Fitch Solutions said since the easing of the Russi-Ukraine conflict looked complicated and lifting of any sanctions would be prolonged and phased, investor interest in gold will remain elevated.

The WGC said there are multiple reasons why inflation will remain high, partly stemming from the unprecedented monetary and fiscal policies put in place to alleviate the effects of the COVID-19 pandemic. 

In particular, lingering supply-chain disruptions from the initial Covid-19 wave and subsequent dislocations as new variants continue to emerge along with tight labour markets, which, combined with COVID fatigue, have increased the number of people voluntarily looking for new, better-paid opportunities.

Gold better during inflation

It also pointed out higher average savings from 2020, which have contributed to lofty valuations in various financial markets, and high commodity prices as other factors supporting the yellow metal. 

Also, traditionally gold has performed well during times of high inflation. “In years when inflation was higher than 3 per cent, gold’s price increased 14 per cent on average,” WGC said.

Complementing WGC views, Fitch Solutions said gold will remain attractive to investors looking for a hedge against inflation for the upcoming months at least.

It said extended waves of Covid-19 have been prolonging restrictions worldwide and leading to uncertainties as long the pandemic exists. This will, in turn, boost gold.

The WGC, too, sees the pandemic situation influencing gold. Currently, the pandemic has gripped China, Hong Kong and parts of Europe, triggering fears of a fourth wave. 

“We believe that gold can still receive positive – if modest – support in 2022 from key jewellery markets, such as India. However, there’s a chance that further Chinese economic slowdown may limit the contribution from local gold jewellery demand,” it said. 

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