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The yellow metal climbed to an eight-month high of US$1,940 per ounce on Thursday. Photo: Reuters

Gold within sight of US$2,035 record amid looming war in Ukraine while market’s ‘fear gauge’ jumps

  • Spot gold approaches an all-time high of US$2,000 per ounce on haven bids as Russia sends troops into breakaway regions in Ukraine
  • Aggressive Fed rate hikes could raise real yields on various assets, dimming the allure of gold that does not earn interest, according to ING strategist

Gold prices are likely to test the record set in 2020 as heightened geopolitical tensions over a Ukraine invasion, runaway global inflation and stock market volatility fanned demand for safe haven assets, according to State Street Global Advisors (SSGA).

The yellow metal climbed to an eight-month high of US$1,940 per ounce on Thursday after President Vladimir Putin ordered Russian troops into two breakaway regions in Ukraine. Spot gold soared to US$2,035 in August 2020 as the pandemic sparked global recession fears and a rush into the safety of US government bonds.
The US, which described Russia’s move as a prelude to an invasion of Ukraine, has responded with several sanctions with its allies. US stocks entered a correction phase this week, as the S&P 500 Index slipped more than 10 per cent from its peak in January while a measure of market volatility rose to near a record.
Higher volatility and geopolitical risks “could trigger more demand for safe haven assets and benefit gold,” said Robin Tsui, Hong Kong-based Asia-Pacific gold strategist for SPDR ETF at SSGA. “Historically, where there has been a slump in equities, it would often coincide with an outflow from equities into gold.”

The S&P 500 lost 33.8 per cent during the depth of the Covid-19 pandemic in February-March 2020, while gold weakened 3.6 per cent, according to data from SSGA and Bloomberg.

Robin Tsui Chi-kit, Asia-Pacific gold strategist at SSGA Hong Kong. Photo: Handut

The VIX Index, which measures S&P500’s expected volatility and is also known as the “fear gauge”, stood at 31.02 on Wednesday, near the record 32 in late January. The five-year average is about 19.

Ongoing risk aversion has prompted investors to rush back into global exchange traded funds (ETFs) that track gold prices, resulting in US$2.7 billion of inflows in January, according to the World Gold Council. Total assets grew 6 per cent to US$221.8 billion. They suffered US$9 billion of outflows in 2021.

SPDR Gold Shares, the largest of the ETFs, has risen 4.3 per cent this year, outperforming the Hang Seng Index and S&P 500.

02:34

Russia’s moves on Ukraine spark protests across Europe

Russia’s moves on Ukraine spark protests across Europe

While the going is great, gold investors face potential headwinds in the form of an aggressive interest rate tightening in the US to quell inflation, according to Warren Patterson, head of commodities strategy at ING based in Singapore.

The Federal Reserve has signalled a rate increase starting from March, with the market pricing in as many as seven increases through 2023. US inflation accelerated 7.5 per cent in January, the fastest pace in four decades.

“The strong inflationary environment is putting increasing pressure on the Fed to be more aggressive when it comes to rate hikes,” said Patterson. Sticky inflation would entrench rate-hike expectations which “would not be supportive for gold prices,” he added.

Improving real yields could weaken the allure of gold, which does not earn interest. Patterson expects gold to retrace to US$1,700 per ounce by the end of 2022, driven by more hawkish Fed policy and a de-escalation of Ukraine-Russia tensions.

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