Gold is in demand as concerns between Russia and Ukraine dampen risk appetite

Financial markets have been jittery over the past few weeks, with developments on the Russian-Ukrainian border continuing to be the main driver of price action.

While central banks are still the dominant underlying theme, traders have to deal with uncertainty over the geopolitical situation, which is difficult to quantify. In this environment, gold has seen strong gains as a traditional safe haven.

One thing that fascinates market followers, be they economists, analysts, investors, traders or speculators, is the simple daily challenge of predicting and evaluating macro and micro news that affects price and risk.

After all, those who take responsibility for taking positions in financial markets are effectively “risk” managers. And these market players can at least try to predict the outcome of central bank decisions by building models based on precedents, economic data and comments from officials.

But the outcome of geopolitical events is not in any playbook, even though history shows what eventualities can result.

So the result of Russia’s standoff, like any other geopolitical incident, is the kind of so-called “tail risk” that cannot be accurately modeled and can have huge consequences for the global economy.

This means outcomes are uncertain with high volatility – and that’s usually the worst that can beset a market.

For example, volatility in the US government bond market, generally known as “the bedrock of the global financial system“, is near its highest level since the peak of market instability during the coronavirus crisis.

Added to the mix were concerns about central banks tightening monetary policy to curb runaway inflation.

This environment of stubbornly high price pressures has recently begun to benefit the price of gold, underscoring the commodity’s status as a hedge against soaring inflation.

While growing bets for further interest rate hikes limited any significant rise in the non-performing precious metal in early January, the crisis in Ukraine provided the impetus for a move towards the psychological price level of $1,900.

Spot gold prices have moved above $1,900 in recent sessions, but it has yet to register a daily close above it – at least for now.

An interesting factor to consider is gold’s relationship to “real” interest rates, which are adjusted for inflation. Historically, “real” rates are inversely correlated to gold, meaning that when they go up, the price of the precious metal goes down.

Indeed, higher interest rates make non-interest-bearing assets such as gold less attractive. Indeed, they would increase the opportunity cost of holding non-performing bullion. But that has not been the case this year. While “real” rates rose, gold prices remained resilient.

This may be due to growing concerns about growth in the United States as the Federal Reserve is forced to act to control inflation.

Several Wall Street analysts are whispering that we could see a policy error from the Fed and other central banks.

While we don’t know if an upcoming decision will drag the US economy into recession for some time, investors appreciate the certainty of holding gold in their portfolios if it does.

Gold has a long and relatively stable history in investment portfolios. It was promoted as a hedge against the diminishing purchasing power of fiat currencies such as the dollar.

He also has a long track record of protecting investors from unexpected shocks as a store of value in times of crisis. We need look no further than 2020, when it paid off to have an investment in bullion as markets struggled to absorb the economic fallout from the coronavirus pandemic.

The short performance history and price volatility of alternative asset classes like cryptocurrencies, which have been dubbed “digital gold”, only underscores the relative appeal of the physical, shiny metal in times of crisis. .

Hussein Sayed is the Chief Market Strategist at Exinity

Updated: February 23, 2022, 04:28

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