Gold prices are moving to a higher value at a pace that has not been seen for quite some time. On Monday, the most active April 2022 gold futures contract opened at $1,920 and closed at $1,900 after recovering from a low of $1,893. On Tuesday, gold prices rose by more than $40 and accelerated a certain uptrend that began in the first week of January. The rally continued today.
As of 4:22 pm EST, April futures are currently up $39.40 (2.00%) and are locked at $1,974.90, meaning gold is up $74.90 this week. , resulting in a net weekly gain from Monday’s low to today’s current price of 4.3264%.
Combined with the price increase on January 31st, this achievement reveals an important fact. In just one month (Jan 31 to Feb 4), gold prices rose $194.90, up 10.94%.
Gold is one of the most important safe-haven assets
Gold is an excellent hedge against inflationary pressures and reacts quickly to geopolitical uncertainty and rising inflation. The recent rise in the price of gold is based on its sensitivity to both an inflation surge and a geopolitical crisis.
In this case, it is a combination of these two events occurring at the same time. This synergistic effect of both geopolitical uncertainty and existing inflationary pressures has simultaneously increased the impact of gold on the global economy.
Most worryingly, the geopolitical crisis in Ukraine has added another layer to inflationary pressures. A few months ago, a Russian invasion of Ukraine was unthinkable. Since World War II, a sovereign country has not invaded another sovereign country under false pretenses. While Russia claimed that their actions were to act as peacekeepers to protect pro-Russian separatists in eastern Ukraine, they declared that the two areas are now independent states. But the truth is that Russia’s intention was to destroy its army and overthrow its government in order to install a puppet government sympathetic to Russia.
Prior to Russia’s invasion of Ukraine, inflation had already reached a 40-year high. The latest data showed that the CPI (consumer price index) reached 7.5% year on year. This is the highest inflation rate since February 1982. Judging by recent events, it can be said with absolute certainty that the inflation rate will reach even higher levels.
The main catalyst that will cause inflation to rise will be directly related to two main factors: first, the rise in the cost of crude oil, which is currently trading at $115 per barrel. Secondly, the ability of Ukraine to produce agricultural products for export to Europe has decreased or been completely destroyed.
Recent oil surge
In December 2021, crude oil futures traded to a low of $62.51. By the first week of January 2022, crude oil futures rose to $74.58. By the end of February, oil rose to $90 per barrel.
From December to February, in a short span of three months, the cost of a barrel of crude oil rose another 43.97%. Even more troubling is that oil gained 19.60% in the first four trading days of this month. This equates to an average daily gain of 4.9% from Tuesday, Feb. 1 to Friday, Feb. 4.
Recent rise in food prices
it is a fact that higher oil prices drastically affect the cost of growing and transporting food. These costs have increased dramatically due to the current conflict in Ukraine. Ukraine, in fact, was the main component supplying agricultural products to Europe. The current crisis has greatly affected Ukraine’s ability to continue to supply agricultural goods to Europe.
Conclusion – spiral inflation and prolonged invasion will be devastating
The obvious conclusion about the impact of the conflict in Ukraine on the current level of inflation is quite significant. This certainly almost guarantees that inflationary pressures will continue to rise to higher levels, causing extreme hardship for the citizens of the world who need these commodities to survive.
For the reasons we discussed above, gold has performed so brilliantly and soared in price. The precious yellow metal does act as a safe-haven asset that should continue to gain value as a hedge against other investment classes in times of political uncertainty and high inflation. The sad truth is that the current conflict in Ukraine is unlikely to have a quick and peaceful resolution. It will take a long period of time to come to an end.
Based on this assumption, that the Ukrainian-Russian crisis will not be resolved quickly and that the current rate of inflation will continue to skyrocket, this is almost certain. If this assumption is correct, it is easy to assume that at some point gold will soon challenge its all-time high of $2,088 and trade at a new all-time high price.
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I wish you, as always, successful trading,
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