The gold market is showing some strong upside in early action Monday as the new trading week gets underway. The general sense of “risk-off” is being fueled by several issues, with the ongoing Russian/ Ukrainian war being at the forefront. As the geopolitical situation deteriorates further, the risks to stocks and risk assets may increase further. This, in turn, may fuel further buying in perceived safe-haven assets such as gold, and the market could potentially see a rapid run to $2000 per ounce or higher.
Russia and Ukraine are supposed to hold talks today about a de-escalation. The President of Ukraine reportedly said he did not feel much would come of today’s talks. Russian President Vladimir Putin recently put his nuclear forces on high alert in another sign that he may be willing to go even further than previously thought. Some analysts believe that cyber attacks from Russia on the West could be seen next. With the Russian President having seemingly backed himself into a corner, some are also entertaining the worst possible outcome: A nuclear exchange between Russia and the U.S.
Recent sanctions slapped on Russia may very well cripple the nation’s economy. The removal of several Russian banks from the SWIFT system could also stop commodity trade from the region, possibly causing a further rise in commodity prices at a time when prices are already moving sharply higher.
As the effects of sanctions are felt, the Russian Ruble sank to a record low versus the dollar. The Russian central bank said it would begin to buy gold on the open market as it was also forced to raise its main interest rate from 9.5% to a whopping 20%. What Russia does next is anyone’s guess, but it seems that President Putin may hold the keys to the country’s future in his hands.
The gold market is also rising due to accelerating inflation. Prices remain high and could go even higher in the months ahead. While it was thought for a period of time that the Fed could hike rates by a half-point next month, the war has eroded that outlook and a 25-basis point hike is far more likely. This hike is not likely to have much, if any, effect on inflation but may be the first of several hikes to be seen over the year. While the central bank has just three rate hikes penciled in thus far, most analysts agree that the Fed may have to hike rates four, five or even six times or more to gain the desired effect. The threat of several rate hikes may keep stock investors wary and could keep volatility elevated for much of the year.
The bulls remain in form control on the daily chart. The next upside target will be the recent highs in the $1970s. The bears will attempt to force a decline in price, ideally back below the $1850 level on a closing basis.