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Monday, September 25, 2023

Geopolitical Risk Pushes Gold Above US$2,000, Oil and Palladium Hit Fresh Highs

Breaking past US$2,000 per ounce over the weekend, the gold price has consistently trended higher since January on the back of record inflation and increasing geopolitical hostility.

Russia’s invasion of Ukraine eroded any investor risk appetite in mid-February, instead driving safe haven demand. Since January 6, the yellow metal has added 12 percent, climbing from US$1,790 to US$2,007 in pre-trading hours Monday (March 7).

The ascent marks the first time gold has passed the US$2,000 threshold since July 2020, when values touched an all-time high of US$2,060 amid pandemic related closures, curtailments and disruptions.

Now, almost two years later, a new set of factors are adding tailwinds to gold’s momentum.

“As a high quality and very liquid asset, gold is regularly used as a safe haven in periods of heightened risk and this is no exception,” Juan Carlos Artigas, head of research at the World Gold Council, told INN.

“The gold price has risen over the past month on the back of inflation concerns, in addition to the potential effect of recent geopolitical events on financial markets and, more generally, the global economy.”

As Artigas pointed out, rampant inflation paved the way for gold’s February growth; last month saw prices rise from US$1,875 to US$1,935. While safe haven positioning has been a major catalyst to gold’s recent moves, the yellow metal’s liquidity is also enticing.

“Gold is a recognized source of liquidity, trading on average more than US$120 billion a day,” Artigas added.

“Gold carries no credit risk, but trades 24/7 and its bid-ask spreads have remained historically tight in periods of uncertainty. Therefore, gold not only protects wealth, but also can provide liquidity for investors in periods when other holdings are either falling substantially or, like in private markets, are not easily accessible.”

Of course, gold isn’t the only commodity seeing price increases during the widespread volatility. Oil prices have soared higher, with both West Texas and Brent crude holding firmly above US$100 a barrel.

Meanwhile, palladium prices reached an all-time high of US$3,338 early Monday. The future of palladium supply is looking precarious, as Russia is one of the leading producers of the automotive metal. In 2020 it led the pack with 91,000 kilograms, and in 2021 it is estimated to have produced 74,000 kilograms, falling to second behind South Africa’s 80,000 kilogram output.

According to Metals Focus, Russia is expected to produce 38 percent of primary palladium supply this year.

“Although there are currently no sanctions on Russian palladium supply, the potential for the metal to be sanctioned, the expulsion of Russian banks from SWIFT and the closure of EU airspace all generate uncertainty and have caused investor-led buying of the metal,” a March 2 report from the metal’s consultancy firm states.

​Gold ETFs see healthy inflows

After pulling back to the US$1,965 range before the morning bell, gold began trending higher again. The precious metal is likely to benefit from the volatility ahead as markets in the US and UK remain depressed, weighed down by uncertainty and bearish sentiment.

“Gold’s value as a strategic asset was brought into focus near the end of February amid significant market volatility,” Adam Perlaky, senior analyst at the WGC, wrote in a Monday note.

Investors have also turned to gold exchange-traded funds (ETFs) as part of their safe haven strategy. February was the strongest month since May 2021, as it saw gold ETF inflows top 21.3 tonnes.

“Although demand across gold-backed ETFs has increased since the beginning of the year, uncertainty surrounding current geopolitical events drove additional inflows and amplified that shift,” Perlaky wrote. “Looking forward, we believe that the geopolitical situation, coupled with inflation, will ultimately result in continued periods of market volatility that have historically supported gold demand.”

As of 10:15 a.m. EST, gold was priced at US$1,981.75.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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