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LAWRIE WILLIAMS: Gold demand in balance despite strong buying

London-based BullionVault, claims to be the world’s largest online and smartphone platform for physical precious metals trading with some US$4.0 billion in precious metals held on behalf of more than 100,000 users from 175 countries.  Writing recently, Adrian Ash, head of research at the online platform, reports that it saw the fastest rise in the amount of new gold investment in March since the Covid pandemic took hold and just about outweighed near-record investor selling at almost all-time high prices, although the March figures pretty much ended up in balance between purchasing and sales.

With profit taking at high levels during a month when the gold price briefly exceeded $2,000 an ounce again, investment demand continued to fall slightly short of the peak inflows to gold of the Covid Crisis and the global financial crisis of 2007/8.

Obviously gold thrived on the twin crisis elements of sky-high inflation and the horrendous daily news reports emanating from the Russian invasion of Ukraine, which caused stock markets to fall back and the gold price remain above the $1,900 level.  But gold actually underperformed many expectations given the severity of the economic setbacks from already-high inflation, exacerbated by the effects of the economic sanctions imposed to bring pressure on the Russian economy, and, hopefully, help lead to an end to the Ukraine conflict.

BullionVault is an excellent source of news, information and commentary on what is going on in precious metals prices worldwide.  Inter alia it publishes continually updated interactive price charts for gold, silver and platinum in a variety of currencies which are very valuable in determining percentage price movements over specific periods of time for the precious metals so covered.

It looks like Russia’s President Putin had been hugely misinformed regarding the Ukrainian people’s desire to maintain their independence and not become purely a vassal state to Russia.  The military response by the Ukrainian army, and the country’s population has already led to the deaths of huge numbers of Russian soldiers and losses of a significant amount of military equipment.  Some estimates put Russian deaths from the invasion as higher than those suffered in Afghanistan and Chechnya combined and has raised huge questions about the supposed invincibility of the Russian armed forces, which may help prevent any attempted incursions into other former Russia-aligned nations in Europe. 

But then perhaps Ukraine was a special case in President Putin’s thought processes and strategic planning.  He had always considered that Ukraine should technically have remained part of Russia and with a large part of Ukraine’s population ethnic Russians, coupled with lack of international and domestic reaction to Russia’s annexation of the Crimea together with the separatist ambitions in the Donbass region, he may well have been led to believe that the Russian forces would be welcomed.  This has not proved to be the case with Ukrainian desire for continued independence, from both Ukrainian and Russian speaking sectors of the populace, seemingly dominant.

It appears, admittedly from Western media reports, that areas occupied by the Russian armed forces have been subjected to particularly brutal treatment.  Kremlin attempts to portray all this as ‘fake news’  have obviously been overtaken in global belief by satellite images of the attrition meted out to key Ukrainian cities which Russian forces have been unable to subdue.  Russia is losing the propaganda battle big time which will have huge long-term consequences on future geopolitical trust when dealing with the superpower.

We were among those that had believed, mistakenly, that Russian denials that an invasion of Ukraine was planned and imminent were real.  Perhaps President Putin now wishes they were.  His failure so far to subdue a much smaller and less well-equipped Ukrainian army is likely to colour his global standing, and that of the Russian nation, for many years to come, and perhaps lead to his eventual downfall.  He no longer appears to be the master-strategist that some of his admirers, including former U.S. President Trump, would have had us believe.

The BullionVault take on the likely future of the gold price is largely inconclusive despite the high inflation levels and the progress of the Ukraine war and although there has been a big rise in purchases through the online platform.  But, in his commentary, Ash concedes that there is no real short term rush into vaulted bullion and any that has arisen has been largely countered by profit taking and rebalancing by existing investors.  Overall this looks to be leaving the market pretty much in balance as it stands at the moment.

All this could change quite rapidly though if there is seen to be any serious breakthrough in the Russia/Ukraine peace talks currently being held in Istanbul among other geopolitical factors.  A military flare-up in the Far East, for example between China and the U.S. over Taiwan, or perhaps between North and South Korea, could also have a dramatic impact.  Meanwhile global inflation will almost certainly get worse before it begins to get better which should be gold positive as real interest rates become even more strongly negative. 

We do live, thus, in a seemingly ever more uncertain world which would tend to favour investment in wealth protection assets like gold.  We therefore suggest that there’s a good chance that the gold price could top $2,000 again by the mid-year and we are also upping our year-end forecast to $2,250.  Not the kind of massive increase predicted by the gold perma-bulls, but one which would still see an above 20% increase on the year, a pretty decent return on investment in a year which could see negative equity growth given high inflation and potentially recession-provoking Fed moves to try and control it.

05 Apr 2022 | Categories: Gold, Russia, US, FOMC

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