Escalation in Ukraine pushes gold prices further up

Gold prices hit their highest level in more than a year this week. Rising tensions around Ukraine and increasing concerns about the economy are causing a flight to gold as a safe haven. Gold prices rose to more than $1,900 per troy ounce, reaching their highest level since June last year. In euros, the price rose to €54,400 per kilo, converted to €1,690 per troy ounce. This is the highest level since August 2020, when the gold price recorded an all-time high of €56,240 per kilo.

In recent weeks, the Gold price in a strong uptrend. This is not only caused by geopolitical tensions, but also by increasing uncertainty about the economy. High energy prices pushed inflation to its highest level in decades, causing the purchasing power consumers. Also, due to high inflation, saving is no longer interesting, so people are looking for alternatives. Until recently, shares were the most popular alternative to saving, but volatility has also increased sharply on the stock market recently. Since the beginning of this year, many stocks have already fallen more than 10% in value. This reinforces the appeal of gold as a safe alternative.

Gold price to highest level since August 2020

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Russia invades Ukraine

On Monday, Russian President Vladimir Putin announced that he would close two areas in eastern Ukraine. recognize, namely Donetsk and Lugansk. In a nearly hour-long speech on national television, Putin explained his decision, after which part of the Russian army crossed the Ukrainian border and entered the area. These two provinces declared their independence in 2014, but that status was not recognized by any country. From now on, Russia will openly support these areas militarily.

Putin's decision will not be without consequences. European countries and the United States are expected to impose new sanctions on Russia, although it is not yet clear at the time of writing exactly what those sanctions will entail. One of the possible sanctions is to cut off Russia from the international SWIFT payment system, but opinions are very divided on this. European countries want to impose sanctions on Russia, but at the same time they are very dependent on oil and gas from Russia. For example, the EU depends on Russia for 40% of its gas consumption. Blocking these financial flows could therefore have very detrimental consequences for Europe as well. Putin has announced that Russia will continue to supply gas to all markets.

Also Read: U.S. sanctions? Russia, China and India create their own payment system

Gold as a safe haven

When geopolitical tensions rise, financial markets always seek refuge in the safest and most liquid investments. Within our current financial system, these are gold and government bonds. Gold has no counterparty risk and the chance that a country will not repay its debts is usually very small. As a result, we have not only seen a rising gold price in recent days, but also a decline in interest rates on government bonds. When interest rates fall, the value of the bonds increases. Over the past seven days, U.S. and German 10-year yields have fallen by about ten basis points.

Gold has historically had a negative correlation with real interest rates, i.e. interest rates minus inflation. Interest rates have risen considerably in recent months, but much less rapidly than inflation. On balance, therefore, real interest rates are still negative, even if the most negative since the 1970s. That explains why the price of gold and interest rates have both risen in recent months. So it remains interesting to own precious metals to protect your assets.

This contribution comes from Geotrendlines