Gold expected to break above $2,000 as Ukraine conflict escalates

Gold is in retreat as investors seem pacified by the latest set of sanctions on Russia imposed by the US and the UK.

Stock markets in Europe are gaining some ground and consequently, investors are selling gold. But given the disturbing news flow from Ukraine, it might be far too early for investors to start relaxing. Footage of Russian tanks rolling into Kyiv is not really conducive to stable markets, and the current assault could just be the beginning of a long and drawn-out battle.

Russian sanctions

Also, in the past sanctions proved futile when dealing with Russia, they tended to have very little influence on the country’s short-term political decision making. As a result, the markets will likely have to live with political instability and volatility for a longer period of time. Sanctions will also not only hit Russia but also Western companies that depend on Russian raw materials in their production, such as in the case of Boeing and titanium, or those with investment stakes in the country such as BP and Shell. The European Central Bank has already said it expects the conflict in Ukraine to reduce the Eurozone’s economic output by between 0.3% and 0.4% this year.

Gold: a stable safe-haven asset

Here is where gold is likely to come back into focus as one of the most stable safe-haven assets.  A number of analysts expect gold to break above the $2,000 a troy ounce mark over the coming weeks as investors seek to escape the high volatility in the equity markets.

For the moment gold is competing with the US dollar for safe-haven status and the dollar is in a better position with the dollar index rising on the day by 1.36%. Today’s gold dip to $1,901.5/oz therefore potentially provides a good entry point into the commodity, particularly given that during the dip gold held above the critical support level of $1,900/oz. The retreat followed a rally earlier in the week which pushed gold into overbought territory. It traded above $2,000/oz briefly and also reached an all-time high against the euro of EUR1,787.85/oz.  But once the current sell-off peters out another push higher seems very likely.

Inflation to support stronger gold prices

Looking at a broader picture for gold this year, the metal will also likely benefit from high US inflation. “In 2022 inflation will remain integral to gold’s fortunes especially if the Federal Reserve’s planned policy tightening is unable to reign in inflation fully,” said ETF-provider WisdomTree in their monthly commodities report.

The European economy is also susceptible to the growing threat of inflation which could potentially push the region into recession. The Ukraine conflict will only exacerbate this threat. It could bring on even higher energy and food costs as Russia is a major exporter of gas and oil and both Russia and Ukraine are major suppliers of wheat, steel and other raw materials. Here is where gold will be able to play a key role as a safe asset.

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