Investors Scramble for Gold as Russia Invades Ukraine

Feb 24, 2022, 10:13 AM EST
This article is more than 2 years old.
Investors Scramble for Gold as Russia Invades Ukraine

Gold has rallied strongly on the news of Russia’s invasion of Ukraine.

It has rallied above at US$1,970.

The invasion occurred as the US and Europe start sanctions against Russia.

The U.S. and its European allies on Tuesday announced a broad range of sanctions against Russia for what President Biden called “the beginning of a Russian invasion of Ukraine” (WSJ.Com, 02/22).

The U.S. sanctions are against two major Russian banks and Europe is halting the Nord Stream 2 natural gas pipeline.

These sanctions are a small part of a larger package of sanctions threatened by the U.S. and European allies – but are designed to limit Russia’s access to global financial markets.

However, many believe that these sanctions are now obviously, not enough to dissuade Russia from a further incursion into Ukraine.

Today, NATO allies and separately G7 leaders are meeting today to consider further actions.

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To elaborate on our discussion in the recent podcast Gold is Needed as a Safe Haven Investment Now More than Ever!” gold has once again served its role as a safe-haven asset and portfolio diversified.

This means it is going up when most assets are declining.

On this point – gold has broken away from its fundamental ‘usual’ negative correlations with real interest rates.

The chart below shows the US 10-year TIPS (Treasury Inflation Protected Securities) as an example of this relationship.

Gold’s Correlation

The U.S. 10-year TIPS yield (blue line) axis is inverted to show the general inverse relationship of the gold price to TIPS yield – in general when TIPS yield rise, as they have done since the beginning of the year, going from around -1.1% to -0.5% the gold price would generally decline.

However, when the safe heaven effect ‘kicks in’ the gold price can also rise. In other words, the safe haven buying is a stronger bullish gold price force than the bearish signal of a rising TIPS yield.   

Gold Price V/S US 10- Year Tips Yield
Gold Price V/S US 10- Year Tips Yield

The Safe Haven Aspect of Gold

The same inverse relationship generally holds for the gold price and the U.S. dollar. When the U.S. dollar rises the gold price (in US dollars) generally declines – the rising U.S. dollar was a major bearish signal for gold in 2021.

However, again this negative relationship is broken in times of safe-haven buying – since the beginning of February, the gold price has risen US$100 while the U.S. dollar has been flattish.

These are two examples of how safe-haven buying outweighs fundamentals.

Gold Price V/S US Dollar Index
Gold Price V/S US Dollar Index

However, the really important aspect of gold as a safe-haven asset is that, as pointed out in the above-mentioned podcast, it retains or increases its value when most other assets are declining.

Gold is Needed as a Safe Haven Investment Now More than Ever!

This aspect of gold (and silver) is becoming even more important as world markets become more correlated.

The first chart below shows the MSCI World Index which is down more than 20% from its peak set in November last year, which is somewhat indicative of most equity indices.

The second chart below shows the gold price and the S&P 500 index, which did manage to continue climbing until January 3 but has since declined just over 10%. And as noted above the gold price has risen over this period.

The third chart below shows the gold price and the bitcoin price – although bitcoin has been touted as a safe-haven asset as the chart shows it has failed to live up to that status during this geopolitical safe-haven buying episode.

If the Russia/Ukraine geopolitical crisis continues on its current trajectory we can expect higher gold (and silver prices) and lower equity prices due to increase safe-haven buying on the uncertainty.   

Gold Price V/S S&P 500 Index
Gold Price V/S S&P 500 Index

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Gold Price V/S MSCI World Index
Gold Price V/S MSCI World Index
Gold Price V/S Bitcoin
Gold Price V/S Bitcoin

From The Trading Desk

Market Update 
Gold prices surged in Asian hours to $1,949 on the back of the escalation in the Russian Ukraine conflict.

Putin ordered military operations with reports that command centers in Kyiv and Kharkiv have been reportedly attacked by missile strikes.

Globally markets are in free fall, oil is back above $100 and precious metals are attracting more flows that have continued into the European market with gold pushing through $1,970 this morning. 

Gold is also rising on the back of global inflation, The Fed will look to hike rates next month by 25bp.

Wells Fargo put out an interesting note during the week on how the gold price action performed during previous rate hike cycles going back to 1994.

Gold has typically bounced following initial Fed rate hikes,” said Austin Pickle, analyst at Wells Fargo. 

“Interestingly, gold, after struggling in the months leading up to the initial rate hike, has tended to rebound higher and even outperform the S&P 500 Index in the months following.

In other words, we believe gold can still shine in the shadow of Fed rate hikes.”

Wells Fargo has a year-end gold price target of $2,000 – $2,100.

Goldman Sachs too upped their year-end target last month to 2150oz (up from 2,000oz).  

As February comes to a close, GoldCore has seen a significant increase in call volumes, new account openings, and trading activity.

Buy sell through rate has crept up to 85%. 

Stock Update 

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23-02-2022 1895.70 1904.70 1392.77 1403.19 1669.54 1680.52
22-02-2022 1895.00 1900.10 1395.29 1402.27 1671.20 1674.75
21-02-2022 1895.45 1894.45 1390.88 1392.04 1668.38 1671.47
18-02-2022 1886.95 1893.60 1386.15 1391.99 1660.14 1669.21
17-02-2022 1886.55 1893.45 1386.24 1389.98 1659.79 1665.48
16-02-2022 1854.40 1862.60 1367.81 1371.80 1629.83 1638.72
15-02-2022 1855.10 1848.55 1368.88 1370.33 1634.90 1632.27
14-02-2022 1855.80 1866.15 1372.55 1378.34 1640.90 1649.30
11-02-2022 1826.25 1831.15 1347.22 1349.01 1603.45 1607.75
10-02-2022 1832.30 1835.35 1350.22 1351.00 1602.35 1605.20

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