Gold Slips as Ukraine Talks May Be Making Progress

Comments provided by Sharps Pixley

For the past month, the precious metal markets have been dominated by the progress or otherwise of the Russian invasion of Ukraine. The early reaction was to take the gold price back above the $2,000 mark, but the price of gold has receded as the war has continued and it has become apparent that a quick Russian victory, leading to regime change, was not going to happen. The price has been fluctuating wildly on the ebb and flow of the Russian advances and setbacks since.

Although any rapid cessation of hostilities between Russia and Ukraine is considered unlikely, the very fact that discussions are currently underway between the two sides in Istanbul, with some concessions seemingly being proposed, this has knocked the gold price back to the lower $1,900s. As always, gold’s up and down movements relative to significant geopolitical developments, tend to be overdone and we suspect it is still far too early to draw any serious conclusions as to gold's future price path as any kind of settlement between the two sides may well remain a long way off.

Certainly the impression that a quick Russian victory against Ukraine would be achieved has proved to be totally unrealistic. The scale of losses of personnel and equipment by the Russian forces appears to be enormous. Morale among the Ukraine’s army seems to be far better than that of the attackers despite the heavy odds stacked against them. Russia now seems to be settling on long distance attrition tactics, seeking to completely destroy targeted Ukrainian cities and forcing the supposedly independent republic to sue for peace. Latest reports suggest a scaling down of attacks on Kyiv and Chernihiv, if any Russian statements are to be believed, although this could just be a move to allow Russian attacks to be concentrated elsewhere.

We have seen the Russian war of attrition playbook before in Chechnya and Syria, so it probably should come as no surprise, but is surely destroying any moral high ground that Russia may have presumed in its supposedly limited military operation. Cities in the recently declared (by President Putin) independent republics of Luhansk and Donetsk (the Donbas) are joining Mariupol, and some others, in being virtually wiped off the face of the earth if they remain aligned to Ukraine. What kind of legacy this will leave behind should these cities succumb to Russian occupation has to be difficult to judge.

As far as economic ramifications go it is unlikely Russia will ever be seen again as a potentially peaceful nation in Europe in particular. Continental Europe accounts for a major proportion of Russian exports – particularly oil and natural gas as well as some key commodities. One suspects that European nations in particular will want to wean themselves off any future dependence on Russian-exports which will probably be costly for the nations themselves, but presumably even more so for Russia which will need to develop new markets. It is likely that China may account for a good proportion of surplus Russian goods, but may be wary if countries like the USA seek to sanction imports which have substantial Russian-sourced content in their make-up.

One consequence of any change in import sourcing by countries trying to avoid future dependence on Russian-sourced goods will likely be an additional boost to inflationary pressures – already running high as recovery from Covid-induced restrictions continues to be seen. Gold, in particular, tends to offer some protection against rising inflation, particularly if real interest rates remain in negative territory. They are indeed already distinctly negative and the additional impact from moving away from a future reliance on Russian imports means that this trend will almost certainly get worse before it begins to get better. Gold and gold stocks may yet again be the best wealth preservation assets available, while general equities look vulnerable particularly given the likely recessionary impact of rising inflation – which may yet be with us for some time to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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