Gold has always acted as a safe-haven asset in times of wars and geopolitical crises.
That’s why, as soon as the news of Russia’s invasion of Ukraine erupted, savers and investors rushed to the safety of gold, confirming its age-old role once again.
Growing investor interest, in turn, pushed the price of gold close to the record it reached during the Covid pandemic.
In this article we explain:
- Why the current geopolitical crisis is making investors buy gold and precious metals.
- What are other key factors driving investors' demand for gold right now.
Savers and investors are rushing into gold, dealers say
Since the start of the war in Ukraine, many gold dealers around the world have seen their sales going through the roof.
“It’s the ultimate backup plan to have the metal within reach. Everyone and their mum is looking at precious metals now,” Stephen Flood, the CEO of physical bullion brokerage Goldcore said.
Other gold resellers, including GOLD AVENUE, saw their sales doubling their usual level.
“Since the crisis in Ukraine started, we’ve seen our orders booming. A 50 gram fine gold bar by PAMP Suisse and a VAT-free 100 oz silver bar were the most wanted products,” Alessandro Soldati, GOLD AVENUE CEO, said.
This growing investor demand comes after an already strong year for physical gold buying. According to the World Gold Council, demand for bars and coins reached 1,124 tons in 2021, the highest in almost a decade.
“Geopolitical crises have always had the potential of driving investment out of risk-on assets like stocks and crypto into safe havens such as precious metals,” Alessandro added.
So what are the strongest factors that push investors to buy gold today? Let’s look at each of them in detail.
What factors drive investor gold demand right now?
Today, geopolitical tensions, the desire to hold gold as a hedge against inflation, and, to a certain degree, actions from the Fed, all help drive investor demand for the precious metal.
Driver #1: The war in Ukraine
Russia’s invasion of Ukraine has sent shockwaves through markets around the world: prices of risk assets such as stocks and cryptocurrencies have tumbled, while traditional safe-haven assets like gold and precious metals have gone up.
Russia-Ukraine conflict: What happened exactly?
It all started with the Russian state deploying over 150,000 troops within striking range of Ukraine.
Despite a flurry of diplomatic efforts, in the early hours of February 24, Russian President Vladimir Putin announced a “special military operation” against Ukraine, tipping a long diplomatic standoff into a full-blown war.
Fighting is now taking place almost on the entire territory of Ukraine, including in the capital city of Kyiv. More than 2.5 million Ukrainians have fled the country since the start of the conflict, according to the latest UN estimates.
As you probably already know, investors moving their capital in or out of gold can move the gold price and create momentum in the market.
That’s exactly what happened when the war in Ukraine erupted: investors rushed into gold and moved its price close to its all-time high, as they were looking for safe-haven assets in the face of the war in Ukraine.
“Investors are making a beeline for it because it is considered a safe store of value during times of geopolitical uncertainty and rising inflation,” said Richard Flax, chief investment officer at digital wealth manager Moneyfarm.
To put it differently, investors are worried about geopolitical instability, as it can deal a serious blow to the global economy and create volatility in the stock market. That’s why so many investors prefer to move their money out of riskier assets such as stocks and digital currencies and convert them into gold and precious metals instead.
Why? Simply because the price of gold usually tends to go up in times of rising geopolitical tensions.
And also because many also see it as a good opportunity to buy gold and then cash in if the price keeps rising (FYI, Goldman Sachs sees the gold price moving up to $2,500 by the end of this year).
Driver #2: Persistently high inflation
Inflation has been all over the news for more than a year now and has definitely been one of the major factors driving investors' interest in gold and precious metals, which are considered a traditional hedge against rising consumer prices.
What are the inflation levels in the E.U. and U.S.?
The Eurozone inflation hit a record high of 5% in December, which was the highest level since record-keeping started in 1997.
In the U.S., inflation rose to 7.9%, pushing a key inflation measure to a level not seen since January 1982.
To make matters worse, analysts warn that a drawn-out conflict in Ukraine will only increase inflation pressure for energy (particularly oil and natural gas) and food (specifically wheat).
So, for the moment, it looks like inflation will remain among the key factors pushing investors to add gold to their portfolios.
Driver #3: Interest rate hikes by the Fed
To curb runaway inflation, the U.S. Federal Reserve has started increasing interest rates, for the first time since 2018.
What are interest rates?
In short, interest rates are the rates at which banks or credit institutions lend funds to each other overnight. These rates are set by the Fed.
For consumers, rate hikes could mean 3 things: higher mortgage rates, higher credit card interest rates, and higher savings accounts rates.
Market analysts have been at odds about how this could affect the gold price and investors' demand for the precious metal.
Some argue interest rate hikes will blunt gold’s safe-haven appeal: “The United States real rates should turn positive by the end of 2022 and see gold’s Goldilocks moment passing,” said Societe Generale analyst Florent Pele.
Others, including Nicky Shiels, Head of Metals Strategy at MKS PAMP GROUP, say that gold will be able to “tolerate” the Fed’s interest rate hikes thanks to “stickier” (read “persisting”) inflation.
“The firepower to combat this [inflation] are 'token' incremental 25 hikes which gold can easily tolerate. Put another way, prices averaged $1,804 under the “transitory” regime, and are currently averaging $1,856 under stickier inflation,” she wrote in a note.
This basically means that the gold price has a potential to grow despite the Fed’s interest rate hikes, which boosts the metal’s safe-haven appeal, thus making it even more attractive for investors.
What’s the bottom line?
The war in Ukraine has triggered havoc in the global market, pushing up commodity prices and making investors seek the protection of assets such as gold and precious metals. This created a boom for bullion dealers, many of whom doubled or even tripled their usual sales levels.
These are the strongest drivers that make investors buy gold today:
- Geopolitical tensions: in times of war, the fear factor often pushes investors to move their capital out of riskier assets like stocks and crypto and buy gold as a long-term safe-haven investment.
- High inflation: inflation remains a big issue for all of us. And the armed conflict in Ukraine will almost certainly make the inflationary situation even worse by triggering higher energy and food prices.
- The Fed’s action on interest rates: market analysts are at odds on this one. While one group says rate hikes will blunt gold’s safe-haven appeal, others think the gold price could easily “tolerate” higher rates simply because inflation is really high.
Since all these events have the potential to upset global economies and markets, we will keep our finger on the pulse to see how they can affect your investments and precious metal savings.
