Gold bulls to benefit from Russia Ukraine war, high inflation; long-term trend remains strong


By Pritam Patnaik

There has been a lot happening for gold in the past few weeks, but the impact on prices has been largely due to three main factors. Firstly, the US Fed has adopted an overtly hawkish stance and indicated that one could expect a 50 basis point or more rise in interest rates in the upcoming Fed meeting in May, in an attempt to reign in runaway inflation. Secondly, the CPI for March came in at 8.5%, higher than market expectations, which was pegged between 8.2%-8.3%, thereby cementing the inflationary fears and adding a premium to gold as a hedge against inflation. Lastly, the unprecedented Russian escalation in military activities, worsening diplomatic isolation, and imposition of a fresh series of sanctions, have effectively dealt a death blow to the ongoing peace negotiations, greatly ratcheting up the geopolitical stress quotient, and greatly enhancing the safe haven appeal for gold. Amidst these contrasting trends, picking on a direction trend is no easy task.

Inflation has been a significant concern for the US Fed for quite some time. The central bank has very few fiscal tools to manage the high inflationary situation, with a rate hike being the primary option. Adding fuel to fire was the onset of the Russian – Ukrainian war, which was the catalyst for a run-away commodity price rise. With the European block, as well as the United States, deciding to boycott imports of Russian oil, which happened to be the third-largest supplier of crude, behind the United States and Saudi Arabia, an already tight supply cycle has contracted further and this has led to a cascading impact of all other commodities too, food prices included. Thus, making the possibility of imminent multiple rate hikes a reality. That said, if one was to closely review the March US CPI data, one will notice that while the YOY numbers came in higher than expected, the MOM numbers came in lower, at around 0.3% growth as against an expectation of 0.5% growth, possibly indicating at the peeking out of inflationary trend. This could translate to softening of the Fed’s hawkish stance; which only time will tell, as pinning too much hope on one data point is not prudent, we should wait for more confirmatory data. In the short term, the probability of a rate hike will keep a cap on gold prices, which could most likely correct close to the actual event.  

For now, the traders are closely watching the developments on the Russian-Ukrainian war front. Russian President Vladimir Putin said on Tuesday that peace talks between their two countries are at a dead-end, promising that Russia would achieve all of its “noble” aims in Ukraine. With the Russian troops pouring into the eastern territories of Ukraine, redirecting its attention from Kyiv has led to the govt of the US and European union having pledged additional financial assistance to the Ukrainian war efforts. This has effectively stamped out any glimmer of hope toward peaceful negotiations between the warring nations. This works well for the gold bulls, as in addition to the geopolitical uncertainty, the war is also the catalyst for higher inflation, thereby greatly increasing not only the safe-haven appeal but also the inflation hedge premium for gold. This will support gold prices in the term.

The softening of USW bond yields and the inability of the dollar index to sustain above the 100 mark, will further encourage the gold investors. The long-term trend remains strong, echoed by the holdings of the SPDR Gold Trust, which rose 1% to 1,104.42 tons on Wednesday.

(Pritam Patnaik is Head of Commodities, HNI & NRI Acquisitions at Axis Securities. The views expressed are the author’s own.)


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