How Trouble in Ukraine is Bolstering Gold

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Last Updated on: 10th February 2023, 11:46 pm

Gold prices are on the rise this week, right as Russian military forces are gathering on the Ukraine-Russia border en masse. Ever-mounting international tensions usually signal growth in “safe haven” commodities, and that’s not all that gold has going for it right now: equities indices in the United States are also down.

Gold, after dropping to $1,280 recently, now represents a buying opportunity for investors.

Ukraine

After Malaysia Airlines Flight 17 was shot down over Ukraine last month, the long-running drama surrounding the Eastern European nation was, once again, fresh in the minds of investors worldwide. After that news, spot prices for gold rose 1.3% in a matter of hours.

In the weeks since, concern over increased conflict in the region has grown. The sight of Russian military forces along the border between the two countries has the international community worried. NATO reports suggest that approximately 20,000 Russian troops have amassed.

Yesterday, Polish Foreign Minister Radoslaw Sikorski voiced concerns about the buildup, indicating that it was not clear whether Russia was putting pressure on its neighbor or preparing to enter it. Bullion prices immediately rose following his statements; gold rose more than $22/oz.

William Jackson, economist from Capital Economics Ltd., told Bloomberg that this news would damage investor confidence in traditional markets and that the sight of Russian troops “adds to the sense that the crisis with Ukraine is ongoing and could escalate.”

Clearly, the conflict in Eastern Europe is tragic from a humanitarian perspective. Nevertheless, gold stands to gain measurably from an escalation.

Equity Markets

US equity markets took a noticeable dive Tuesday. While the news out of Ukraine is partially to blame, several other factors have once again stoked fears about another potential global downturn.

Disappointing labor numbers were reported from the US government on Friday. Real wages have flatlined, and wages as a share of GDP are declining. Internationally, news also broke that German bond yields are historically low and that Italy’s economy is already in contraction, perhaps hinting at trouble in the Euro Zone. Asian stocks fell on Wednesday.

There are reasons to believe that the huge gains in the equity markets over the past year are completely the result of a speculative bubble – after all, there haven’t been any real gains in production to warrant confidence in equities.

What It Means for Gold

It’s no secret that investors are “market risk” averse – signs of trouble make them nervous and begin looking for alternatives. Gold is the natural alternative hedge against falling stocks, slipping currency value and general economic malaise.

Thomas Capalbo, precious metals trader for Newedge brokerage, stated the implications

for gold quite simply. “Gold is getting a boost as the S&P is now sliding,” says Capalbo. “Gold’s earlier drop to $1,280 provided a buying opportunity.”

Gold has posted moderate gains of about 7 percent this year, mostly due to a surprisingly strong dollar (meaning that the dollar hasn’t lost value as much as expected, really).

We’ve detailed why the dollar’s days may be numbered. If the stock market really is just an asset bubble (what else could it be?), the recent stability in greenbacks will be threatened.

Stocks look especially vulnerable now that Russian President Vladimir Putin seems bent on disrupting world markets. He recently signed a decree which either limited or banned the import of agricultural products from countries that have imposed sanctions on Russia – like the United States. While this move will ultimately hurt poor Russian food shoppers more than Washington D.C., reduced demand for American exports does the market no favors.

And let’s not forget the potential of Russian incursion into Ukraine, a resource-rich nation whose pipelines control as much as 25 percent of the oil flows into mainland Europe.

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