Russia’s Invasion of Ukraine May Push Gold Prices Beyond $2000 Per Ounce

March 21, 2022

Last week, industry experts felt the supply of diamonds and gold would not see a short-term supply disruption after Vladimir Putin invaded Ukraine. The recent news of G7 and European Union nations suspending Permanent Normal Trade Relations (PNTR) with Russia along with the United States currently banning the sale of Russian diamonds in the country has changed this analysis.

The uncertainty about the short-term supply of gold has led to chaos in the global marketplace over the past several weeks, especially within the past several days, as the price of gold continues to see unpredictable fluctuation. 

At the beginning of the year, analysts at Goldman Sachs suggested the 12-month price of gold would reach $2,150 per troy ounce. The belief was the US would see a regression in economic growth due to the long-term effects of the COVID-19 pandemic. However, once the war in Ukraine began, Goldman Sachs feared the potential fallout would compound US recession concerns with the new realization of inflation concerning gold. Their forecast adjusted to suggest the price of gold would rise to $2,350 in 12-months.

As the international community cracks down on the Putin regime, and by proxy the Russian Federation, Goldman Sachs would again suggest the price of gold would rise another 25% and reach $2,500 an ounce by the end of the year. "The last time that we saw all major demand drivers accelerate simultaneously was in 2010-2011 when gold rallied by almost 70 per cent. Given the material upward revision in investment and demand assumptions, we now upgrade our 3 /6 / 12-month gold targets from $1950/2050/2150 an ounce to $2300/2500/2500 per ounce," Mikhail Sprogis, Sabine Schels, and Jeffrey Currie of Goldman Sachs stated in a recent memo regarding the situation.

On Tuesday, March 8^th, gold peaked at $2,069.89, nearly reaching the 2020 record of $2,072.50. The price would drop to $1,980 on Friday, March 11th, but remains significantly higher than the $1,800 price at the beginning of 2022.

"Higher energy and food prices predicate further inflation surprises ahead, which should keep U.S. real interest rates lower for longer," said UBS analyst Giovanni Staunovo to Yahoo Finance. Gold is often used as a countermeasure to inflation, economic and political turmoil, yet Staunovo remains skeptical that betting on significant price gains over the long term is a wise choice due to the war coming to an unexpected end. "To turn bullish on gold, we would need to see a stagflation-type event that sends global growth sharply lower," he said.

Early Monday, spot gold fell over a percentage point to $1,963.30 per ounce, while US gold futures dropped just under a point to $1,967. Margaret Yang, a strategist at DailyFX commented on the sudden drop. "One key reason is surging treasury yields. Also, market seems to be pricing in on the FOMC meeting on Wednesday at which the Fed may start to kick off the tightening cycle. So, this is a negative factor for gold."

However, Yang seemed optimistic about the possibility of a quick resolution to the war in Ukraine, "Given the fact that both sides are willing to talk, I think the worst of the Ukraine crisis is probably behind us. It's unlikely that gold price will surge beyond the previous high from last week or reach a record high anytime soon."

Yang's optimism comes despite signs on the ground pointing in the opposite direction. While open dialogue between Putin's regime and Ukrainian leadership is a good sign, Putin recently ordered several assassination attempts on Ukrainian President Volodymyr Zelenskyy's life that were thwarted by anti-war assets within the Russian Federal Security Service (FSB). With the Russian military gaining ground in several areas, despite being shocked by the strength of the Ukrainian defense, the battlefield is not yet dire in the eyes of Putin.

Gold prices in India continue to rise, despite seeing a slight decrease on Monday, March 14th. Prices throughout March have skyrocketed in India, which is also a key nation in the diamond market. Avery Shenfeld, chief exomist of CIBC World Markets told Kitco News, "Investors have done a U-turn in their assessment of what Russia's invasion of Ukraine will mean for US monetary policy ahead. A brief flirtation with the idea that the war's economic costs would temper the rate hike path has been quickly reversed, with the February CPI data being a further reminder that inflation is breaking out in just about every major category of goods and services."

While some experts are hopeful gold won't see long-term inflation, it would seem the general consensus remains that the precious commodity will continue to see a rise in price throughout the 2022 calendar year.