Impact Of The Ukraine War On Gold Price

2022年10月2日

With the US dollar recently hitting a 20-year high and Treasury yields rising above 3.3%, gold prices dropped to around $1,700 an ounce, as the US Federal Reserve (Fed) looks set to continue aggressively hiking interest rates, especially in light of higher-than-expected inflation numbers released on 13 September.

The precious metal is down over 3% over the past months, having erased all the gains it made earlier in August. The gold price remains well below the $2,000 level seen in early March.


Have demand-side dynamics dominated the direction of the gold market?


Gold is like no other commodity. It has unique supply and demand features that make gold unique in commodity markets. It is used to store value, used for transactions, but also as speculation. It has all these different features and therefore different types of investors are interested in gold. The first type of investor uses gold to store value or for wealth preservation. Central banks buy gold to diversify their reserves. Central banks’ gold reserves have increased, and they are at the level of the 90s (see the graph on the left below). Also, the People’s Bank of China and the Russian central bank (see graph on the right below) bought gold. But in recent years they stopped doing so.


Not only central banks have bought gold to store value and for wealth preservation, but investors have also done so. They have the tendency to buy gold if they fear inflation if there are geopolitical fears or increased tensions or even a war. If they fear inflation, they think that central banks will not tighten monetary policy fast enough to counter inflation. Then inflation expectations will rise at a faster pace than nominal yields. As a result, real yields will decline. Gold is an asset that doesn’t pay a coupon or dividend, but it is not declining when inflation expectations rise (see graph on the left below).


What about the supply?


On 7 March, the London Bullion Market Association (LBMA) suspended all six Russian gold refineries from its Good Delivery List, meaning their newly minted bars (cut from a rolled strip of gold ) can no longer trade in the London market. London is the biggest marketplace for gold in the world by volume of trade. Could this result in a shortage in the gold market? In our opinion not. First, the supply side of gold is very fragmented.

A lot of countries mine and export gold and there is no monopolistic or oligopolistic market structure. China is the largest gold miner with 12% of the world supply, next comes Russia with 10% (see graph on the left above). So, this is a completely different picture than palladium where both Russia and South Africa are responsible for around 40% of the supply; they hold together 80%. Second, the aboveground stocks of gold in the form of jewelry are enormous (see graph on the right above).
At the end of 2021 total, of above-ground stocks stood at 203,000 tonnes while the annual mine supply is around 3,300 tonnes. Therefore, it is very unlikely that the gold market will experience a shortage. Of course, the price needs to be attractive enough for the holders of gold jewelry to sell. So, the price could still rise. Even though we think a global shortage is unlikely, there could be a temporary shortage in a certain location/country.


The US central bank is likely to raise borrowing costs faster and further than previously expected after Consumer Price Index ( CPI ) data released on 13 September showed underlying inflation is continuing to grow, defying economists’ expectations. The CPI rose 0.1% in August on a seasonally-adjusted basis, according to a report by the US Bureau of Labor Statistics, showing growth of 8.3% year on year.
The CPI is the most well-known indicator of inflation, measuring the percentage change in the price of a basket of goods and services consumed by households.

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