LAWRIE WILLIAMS: Gold quickly recovers $2,000 level as war entrenchment intensifies
In an article we published yesterday in noting that the gold price had surpassed the $2,000 level, but had subsequently been marked down sharply again in U.S. trade we posed the question of how long this reversal would last with the Russian invasion of Ukraine continuing. The implication was that gold would recover this key level again quickly, and that certainly has proved to be the case. The price actually fell back to the $1,860s at one time, but at the end of the day’s trading was approaching $2,000 again. Then overnight in Asia, and this morning in Europe it surged back comfortably above the $2,000 level, and has already been moving up in the U.S. markets immediately following their open. Nevertheless, there are certainly some major players in the ongoing gold market who will have an interest in keeping the price suppressed. We do suspect, though, that gold is making a new base at, or around, the $2,000 level or higher. My most recent year-end price forecasts are already looking vulnerable to the upside, although if the Ukraine conflict comes to an end, all could crash down again quite rapidly.
As we explained yesterday, the rise in the gold price has been supported by the high levels of inflation. These have been hugely exacerbated by the economic fallout from the Russia/Ukraine conflict. There are fears that the Western sanctions being imposed on Russia will spill over on to oil and gas supplies on which much of Europe, although perhaps not the UK and Scandinavia, is hugely dependent, although so far there has been no European embargo on Russian oil and gas. But the fear that these key supplies might be affected is having a huge impact on global oil and gas prices.
In addition, both Russia and Ukraine are major food and grain exporters, and prices of these are already being impacted, driving them up accordingly at a time when those on low incomes in particular can least afford it. One suspects that all this is already having a huge effect on everyday price inflation, driving real interest rates into hugely negative territory. And again, as we have noted previously, non interest-generating, but price-stable, assets like gold tend to benefit strongly from such economic pressures. Consequently we have been seeing traditional safe-haven assets like the U.S. dollar and gold advance strongly. They will likely continue to climb unless, and until, relative peace returns to Ukraine which does not, as things stand currently, look like happening any time soon.
Russia’s President Putin seems to have totally misjudged the likely level of Ukrainian resistance to the Russian attacks, and the human life and economic costs that have resulted, not to mention the loss of any aura of military invincibility of the Russian armed forces. However he also seems unlikely to back down and may continue with the Russian advance until his main objectives have been achieved, no matter that this may degenerate into a guerrilla-type conflict that could continue almost indefinitely. The only way out, apart from a change of Russian leadership which may be unlikely, could prove to be finding some kind of compromise solution that would enable Putin to withdraw his troops and save face at the same time.
The most likely such solution, it seems to us, would be recognition by Ukraine and the West that the Crimea is now indeed part of Russia and, perhaps, the absorption also of the Donbas region, or at least a part of it, into Russia too. Ukraine might be forced to drop any ambitions to join NATO and the EU as well. Whether this would all ever be acceptable to the Ukrainian government and people would, of course, be open to question, in which case the war may continue with all its adverse effects on the global economy and stability, particularly as Western economic sanctions would probably continue to be imposed in such a scenario, or even be further enhanced.
As for gold and general equities, we remain positive on the former as long as the Ukraine conflict persists, and negative on the latter. Gold stocks, though, should perform well given high profitability levels at current metal prices. General equities will probably see occasional recoveries as over-optimistic investors think any falls are overdone. But although some counters may benefit from high inflation levels, the majority look to be in a major decline phase. Caveat emptor.