The gold market is higher today as markets digest the Russian invasion of Ukraine. Against a backdrop of bullish fundamentals and technicals, longs stepped into the market again today, buying the decline seen earlier in the session. With spot gold now standing around the $1908 level, the bulls are nearly halfway through a key resistance band from $1903 to $1923. If the bulls are able to mount a run higher and close the market above $1923, the stage could be set for a rapid and sharp run higher that could see $2000 per ounce or beyond in the weeks ahead. Gold prices are now at an eight-month high as risk aversion has set in.
The Russian invasion of Ukraine remains at the top of the list for market concerns. The question now, however, is whether the situation will take another turn for the worse or if worst case scenario fears will not be realized. For the time being, it appears the West has no interest in a military confrontation. Additional sanctions have been slapped on at this point and it is likely the U.S. and its allies will take a wait and see approach to gauge their effectiveness. That being said, however, a change in the dynamics of the conflict could change things quickly. A full-blown invasion deep into Ukraine, for example, has the potential to provoke the U.S. and its allies into military action. A full-blown ground war is something
no one wants to see. The casualties from such a conflict could be astronomical and it could set U.S./Russian relations back for decades to come.
While the marketplace appears to be slightly calmer about the situation today, the slightest mistake by Russia or the West could lead to war. Markets have a tendency to overreact to such situations, seemingly always planning for the worst-case scenario. Investors may now be wondering if the markets have already adequately priced in the risk of war or if the fear and anxiety have already peaked. If tensions do calm from here going forward, the gold market is likely to see a decent pullback in price as it likely has at least $20 worth of risk premium built into the price at this point. If tensions escalate, however, the gold market could see a rapid rise that takes it to $2000 or back to previous all-time highs. With little chart resistance in the bulls’ way, the market could run higher rapidly, forcing more shorts to cover in the process.
Inflation also remains a large source of concern for markets and is likely not going away anytime soon. The Fed has already suggested it plans several hikes this year, with the first set to take place in a few weeks. Markets now seem to believe that the Fed will hike rates by a full half-point next month for the first time in over 20 years. The last such hike ended the dot.com era for equities, and it could have similar consequences this time around.