LAWRIE WILLIAMS: Another weekend and no seeming end to the Ukraine war.
President Zelenskyy, who knows how to use the media to his best advantage, is winning the propaganda war hands down as far as the West is concerned. This leads one to wonder how President Putin’s Russia can ever recover any segment of high ground in the eyes of world opinion.
One suspects that the populations of even pro-Putin supporting nations will have become aware of some of the horrific video coverage coming out of beleaguered Ukraine unless their media is subjected to the kind of state control and opinion-suppression seen in Russia itself. Whatever excuses the Russians may make as to provocation, Naziism and liberation of a supposedly oppressed Russian-speaking community, images coming out of destroyed cities like Mariupol tell a story that can never be countered. Russia is thus being seen as a heavily-armed bully, which appears to be suffering something of a bloody nose in terms of extreme heroic resistance from the Ukrainian and Russian-speaking military and from a community which seems to value its independence above all else.
Of course the economic effects of the war are having an enormous effect globally. Not only is Russia a key supplier of oil and natural gas to world markets, but also of a number of vital base and precious metal commodities. But it does not stop there – both Russia and Ukraine in combination are the world’s biggest global exporters of grain, sunflower products and fertilizers. Interruption to these supplies either directly by conflict, or through drastic sanctions being imposed on Russian exports, will leave much of the world deprived of many key trade elements. Not only will this put up prices dramatically as nations compete for alternate supply sources, but confine some poorer nation in particular to food poverty and potential starvation within their populations. The whole world, therefore is reaping the whirlwind of President Putin’ s contrived war.
The world has already been reeling from the inflationary effects of exiting from Covid-related restrictions. In some nations – particularly within the world’s leading industrial economies – post-pandemic economic recovery has helped mitigate some of these effects – at least in the short term. But the longer term effects are probably yet to be fully felt. We have been a little surprised by the relatively lacklustre performance of safe haven assets like gold, which one would expect to do particularly well in a global economic crisis of this magnitude. But in our view its time will surely come as the new economic reality emerges.
Indeed the yellow metal has reacted fairly strongly to world events already – it’s just that the perception of where it was likely to head after breaching the $2,000 level last month was not sustained. Big, and rapid, upwards price movements nearly always tend to be overdone initially and therefore prompt a fairly significant correction.
In the event there has actually been a fairly steady price increase since the end of January when the gold price was a little below the $1,800 mark. From there it surged to around $2,050 during March, before settling down to consolidate at around current levels. From here we would anticipate an upwards trend as inflation reality sets in, culminating in it testing the $2,000 level again perhaps by mid-year. There could be an occasional setback – in particular if there is seen to be a solution to the Russia/Ukraine war and Russian forces withdraw, although this still looks unlikely in the short term. Even if this should happen, if the stringent economic sanctions on Russia remain in place, there may be no downwards correction – except perhaps for a couple of days.
The other major factor which could have an effect – either positive or negative, on the gold price would be the continuation of price inflation in the U.S. at the current high rate – or even higher, which we think is likely, and the severity of any Fed moves to try and bring it down. There is already talk of possible 50 basis point Federal Fund rate rises at the next couple of FOMC meetings (scheduled for May 3-4 and for June 14-15) but although this, if these rises are put in place, might provide a shock to the markets. the rises would still likely be insufficient to take real interest rates out of negative territory and gold could then, after a short hiatus, resume an upwards path overall.