A melancholic anniversary

Two years of war in Europe and what's changed? A while ago we said both Russia and Ukraine were too weak to win but too strong to lose. Despite the war apparently shifting more in Russia's favor that still seems the case. The Dollar denominated gold price rose above $2,000/ounce shortly after the invasion, partly because Russia said it would increase its gold reserves as a means of coping with the effect of sanctions, and partly because investors anticipated - falsely it turned out - a cut in US interest rates. Demand for gold in Russia soared in 2022; Russians bought more than 50 tonnes that year, 10 times more than the previous year.

Around the world nervous central banks have loaded up their gold reserves since the start of the war. So geo-political turmoil is a key driver of the gold price, right? No.

It's interest rates

From the spike above $2,000/ounce in February 2022 by October that year gold was struggling to hold its nose above $1,600. Since then it has gradually recovered all that lost ground and is back to where it was two years ago, above $2,000. This movement has nothing to do with the Ukraine war and is almost entirely correlated with guesstimates about the direction the US Federal Reserve might be headed with interest rates. High interest rates tend to depress the gold price and vice versa, so big potential investors in gold are waiting for the Fed to start cutting rates this year from the current 5.25-5.5%, a 23-year high.

And the Fed is giving no hints as to when rates might start to come down. The minutes of the Fed's 31 January meeting, just published, confirmed that the US central bank "remained highly attentive to inflation risks". Consumer prices fell from 3.4% in December to 3.1% in January, a smaller improvement than had been expected, while core inflation, which strips away food and energy, was stuck at 3.9%, unchanged from December. And the Fed takes comfort from US economic growth - gross domestic product (GDP) in the final quarter of 2023 was a very healthy 3.3%. The Fed has a dual mandate - it aims to achieve price stability and full employment. The US unemployment rate is more or less that same as it was in March 2022, when it started its rate-hiking.

2024 is also looking fairly rosy - the ratings agency S&P Global expects real (i.e. inflation adjusted) GDP growth of 2.4% this year. Given all this optimistic data it's little wonder that most observers expect the Fed to start to cut rates not in its next meeting, in March, but the one after, at the end of April.

Careless talk

Jens Stoltenberg, secretary-general of NATO, this week said that Ukraine has "the right" to attack military targets inside Russia, a potentially dangerous expansion of the war; any NATO- produced and supplied missile, for example, used by Ukraine against Russia might be used as a de facto NATO attack on Russia. Stoltenberg's words are remarkably similar in tone to recent remarks on the war by leaders of NATO member states. Ukraine, where the average age of a soldier is now above 40, has held off Russian attacks partly because of courageous determination but mostly thanks to foreign supplies. There is now a growing reluctance to send Ukraine more aid, as evidenced by the blockage in the US Congress to send a $60 million package.

However, one should not be misled into thinking that more intense military action will see the gold price spike higher and stay higher. The war, like all wars, is a destructive and awful tragedy. One must hope that this ends soon. But for gold to find its next leg-up we must wait almost until the start of summer.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.