Inflation and war cause turbulence on the gold market

Gold, Palladium, Platin, Silber

The war in Ukraine caused panic on the stock exchanges between the end of February and the beginning of March. While share prices plummeted, gold benefited from its position as a „safe haven“, and the price rose to its highest level since the summer of 2020. In the last few weeks, concerns about inflation and the central banks‘ reactions to it came to the fore again in the financial world, and this is likely to remain the dominant theme for precious metal prices in the summer months.

Shortly before Russia’s large-scale attack on Ukraine on February 24, the crisis metal had already reacted with price increases. Since the publication of the last Focus on Precious Metals on February 9, a gram of gold rose from around €51.50 to more than €54 immediately before the start of the war.

After that, there was no stopping it, and when fears of an escalation to a third world war spread in the second week of March, the stock market price shot up to more than €61 per gram at its peak. In the same period in which gold rose by almost 19 %, the most important European stock index, the Euro Stoxx 50, fell by about 19 %. The importance of gold as an instrument for the diversification of capital investments was thus once again impressively demonstrated.

From an international perspective, a new price record was only just out of reach. On London’s LBMA precious metals exchange, gold reached an all-time high for the year of US$ 2,039 per troy ounce at the afternoon fixing on March 8. But on August 6, 2020, against the backdrop of the economic turmoil caused by the Corona pandemic at the time, an even higher price was recorded at US$2,067 (see grey line in the chart above).

The situation is somewhat different when looking at the gold price in euros. Here, with the mentioned price of €61 per gram, the previous high of August 2020 at €56 per gram was clearly surpassed and thus a new record was set (see green line).

In the past few weeks, the price declined somewhat, which fits well into the pattern of previous similar events. When Iraq invaded neighbouring Kuwait in August 1990, the gold price rose by about 12% within three weeks before falling again. It was similar in the context of the terrorist attacks of September 11, 2001, when gold rose by 7% in just over two weeks and then fell slightly again. Typically, the stock markets turn to other topics relatively quickly after the initial scare, and this is likely to continue this time as well, provided there is no international escalation of the war.

This new or old topic is currently the high inflation, which recently reached almost 8% in the USA and the Eurozone. In addition, the reactions of the central banks play an important role. However, the influence of these developments on the gold price is not clear. On the one hand, interest in investing in gold tends to increase when inflation is high, and, currently, it does not look like this phase will be over quickly in the coming months. On the other hand, several central banks are rapidly raising their key interest rates in order to cool the economy and thus dampen inflation. For example, the decision-making body of the US Federal Reserve decided to raise interest rates by 0.5 percentage points at the beginning of May, and further increases of this magnitude are planned in the coming months. Yields on US government bonds with a remaining term of 10 years have, therefore, already exceeded the 3.0 % mark. And fundamentally, rising interest rates are unfavourable for interest-free capital investments like gold. The longer and steeper that interest rates rise, the more this effect is likely to prevail.

In the coming months, a second aspect is likely to dampen the demand for gold; the increase in the price of energy, food and other everyday items leaves many people hardly any financial leeway to purchase luxury goods such as jewellery. The World Gold Council as an interest group of the mining industry estimates that jewellery gold purchases were already 7% lower in Q1 2022 than in the same quarter of the previous year. This trend is likely to continue in the coming months.

In addition, the sanctions and the economic slump will also leave their mark on jewellery gold demand in Russia. With an estimated demand of 40 tonnes of gold per year, this market is about twice as big as Germany’s and France’s combined, and this does not even take into account the jewellery purchases of wealthy Russian buyers abroad.

In conclusion, the gold price has the potential to soften somewhat in the coming months, provided the war in Ukraine does not escalate. In view of the political and economic risks, however, the price is likely to move only moderately.

Read now the whole current Fokus Edelmetall issue by Dr. Thorsten Proettel. Here you will find further topics:

  • Economic slowdown weighs on silver price
  • Ukraine war sends palladium price on roller coaster ride
  • Inflation affects platinum production

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Disclaimer: Dr. Thorsten Proettel is responsible for the preparation of this report on behalf of C.HAFNER GmbH & Co. KG, Wimsheim. The opinions and market information published in this report are based on assessments made by Dr. Thorsten Proettel at the time of preparation. The information and estimates do not constitute any form of advice or recommendation, forecasts and expectations are subject to the usual market risks and actual results may differ significantly from the assumptions and expectations. C. HAFNER GmbH & Co. KG is not obliged to update, amend or supplement this document or otherwise inform readers if any assumption, estimate or forecast contained in this report changes or is no longer accurate. Neither C. HAFNER GmbH & Co. KG nor its management bodies and employees accept liability for any damage or loss arising from the use of this document. This document is exclusively for the information of the recipient. No part of this document may be reproduced in any form or by any means without the written permission of C. HAFNER GmbH & Co. KG is permitted. Responsible according to § 55 Abs.2 RStV: Dr. Philipp Reisert