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LAWRIE WILLIAMS: IMF warns of severe economic impact of Putin’s war.  Latest gold, silver and pgm forecasts.

The International Monetary Fund has now warned of the severe global economic impact of the Russian invasion of Ukraine and of the sanctions that have been imposed on President Putin’s Russia as a consequence.  We would wholeheartedly agree and have already seen equities dip and precious metals rise sharply in consequence.  We suspect there will be more to come in this vein unless there is a rapid end to the Russian advances on a brave, but outgunned nation, which we see as unlikely to happen.

The initial impact of the Western sanctions seems to have already been having an impact on the Russian populace and there are reports – perhaps exaggerated by Western media – of a burgeoning anti-war movement emerging there despite draconian measures to prevent this.  Putin’s autocratic rule may well succeed in suppressing such opposition. 

The sanctions impact seems to be crippling the Russian economy already, perhaps faster than even the most confident Western leaders may have suspected, but they will also be having an adverse impact on Europe in particular too.  Europe and the whole western economy has become heavily dependent on Russian commodity exports – notably on oil, natural gas and grain – and any interruptions to sales of these will have a strong effect.  But, one suspects, the West is prepared to suffer a fair amount of economic pain in solidarity with the under-attack Ukrainian people.

The world, though, is already under economic pressure from inflation resulting from the slow recovery from the Covid-19 pandemic, and the sanctions on Russia are bound to have an additional inflationary impact.  We have already seen soaring oil and gas prices (Russia is a huge producer and supplier of these) and it is a top global supplier of grain and precious metals too.  Palladium - necessary as a catalyst in exhaust emission control in petrol-fuelled internal combustion engine vehicles, for which Russia is comfortably the world’s largest producer - has already seen a massive price increase. 

Gold has also seen a big leg-up in price and although Russia is the world’s second or third largest gold producer it is probably not a consequential tightening of supply that has been responsible here, although it will probably have contributed, but it has been the yellow metal’s safe haven and inflation hedging attributes which have been most responsible here. 

Rapidly rising inflation is a huge contributor to reduced currency purchasing power, whereas gold has a long history of wealth protection under such circumstances, particularly when real interest rates turn negative.  With central banks worldwide seemingly falling over themselves to take base interest rates down to near zero, or even negative, the current high inflation rate is making real interest rates distinctly negative  and getting worse by the day.  As a non interest-generating asset, which is considered a downside for gold investment when real rates are positive, gold tends to come into its own as a wealth protector in a negative real rate environment.

Back at the end of 2021 we published here our price predictions for the precious metals, and although our forecasts were generally very bullish in comparison with other predictions, the Russia/Ukraine war has already seen these forecasts mostly overtaken by events.  So we publish some revised forecasts, which in all cases are substantially higher, below:

Table:  Precious metals price forecasts for end-2022

Metal

Price at time of writing

Price Forecast end-2022

Gold

$1,985

$2,500

Silver

$25.70

$32.00

Platinum

$1,140

$1,500

Palladium

$2,900

$3,500

       

While these predictions are all substantially higher than the ones we made at the end of 2021, if the Ukraine war is prolonged and the sanctions on Russia are fully implemented, we are conscious that even these far higher price predictions may prove to be very conservative.  Much will depend, as usual, on the progress of the U.S. economy and the effectiveness, or otherwise, of the U.S. Federal Reserve (the Fed)’s attempts to control inflation – likely to be wholly ineffectual as we see it at the moment. 

New U.S. Consumer Price Index (CPI) data is due for release on Thursday and we assume this will show a continuing upwards trend and that any subsequent interest rates rise by the Fed will be hugely insufficient to halt the upwards path of inflation which will be exacerbated by the impact of the Russian economic sanctions, although perhaps not yet.  The new CPI figures will have been compiled before any new sanctions will have taken effect.  We thus fear worse is still to come!

07 Mar 2022 | Categories: Gold, Silver, Russia, US, Palladium, Platinum, FOMC

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