Gold hit a 20 month high on Wednesday of $1940, driven mainly by the Russian invasion of Ukraine. There has been significant volatility since but gold is hovering around the $1,900 mark.
The price of gold often rallies during times of geopolitical uncertainty. For instance, following the killing of Iranian general Qasem Soleimani in early 2020, the price of gold hit levels it had not seen since 2013.
The war in Ukraine, however, has the potential to be much more destabilising to financial markets.
The conflict is potentially escalating and so too are the severity of sanctions placed on Russia. One economic historian has described the sanctions on Russia as “a declaration of all-out financial warfare against Russia.”
Therefore it is expected that conflict will continue to exert significant uncertainty on the equity and bond markets. As an insurance asset, gold comes into its own in periods of uncertainty such as this.
There is also pressure on energy markets and the likelihood of disruptions to supply. Higher energy prices were already the principle driver of inflation in Europe prior to the outbreak of the war. Energy prices have a significant weight of almost 10% in the European Harmonised Indices of Consumer Prices (HICP). Therefore higher energy prices will likely result in higher short and medium term inflation.
There is also the risk of higher inflation through agricultural prices. Russia and Ukraine combined make up 27.9% of global wheat exports. If there are supply disruptions, this would have an impact on prices and consequently on inflation. Together with the impact from energy prices, this could lead to significant inflationary pressure. This plays into the historic uses for gold as a hedge for inflation and also market uncertainty.
A final way potential impact is on the supply of gold itself. Russia was the world’s second largest supplier of Gold in 2021. Should they be unable or unwilling to export gold, this could have a negative impact on available supply and potentially impact gold prices.
The Royal Mint Physical Gold ETC – RMAU is a potential way to implement a gold investment. It has arguably the most secure way to hold physical gold as it is held by a sovereign mint versus similar Gold ETCs where the gold is held in custody at banks in London and New York.
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